Notes
to Consolidated Financial Statements
NOTE
1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
MariMed
Inc. (the “Company”) is a multi-state operator in the United States cannabis industry. The Company develops,
operates, manages, and optimizes over 300,000
square feet of state-of-the-art, regulatory-compliant
facilities for the cultivation, production and dispensing of medicinal and recreational cannabis. The Company also licenses its
proprietary brands of cannabis and hemp-infused products, along with other top brands, in several domestic markets and overseas.
Upon
its entry into the cannabis industry in 2014, the Company was an advisory firm that procured state-issued cannabis licenses on
behalf of its clients, developed cannabis facilities which it leased to these newly-licensed companies, and provided
industry-leading expertise and oversight in all aspects of their cannabis operations. The Company also provided its clients with
as ongoing regulatory, accounting, real estate, human resources, and administrative services.
In
2018, the Company made the strategic decision to transition from a consulting business to a direct owner of cannabis licenses
and operator of seed-to-sale operations (hereinafter referred to as the “Consolidation Plan”). The Consolidation
Plan calls for the acquisition of its cannabis-licensed clients located in Delaware, Illinois, Maryland, Massachusetts, and
Nevada. In addition, the Consolidation Plan includes the potential acquisition of a Rhode Island asset. All of these acquisition
are subject to state approval, and once consolidated, the entities will operate under the MariMed banner.
To date, acquisitions of the licensed businesses
in Massachusetts and Illinois have been completed and establish the Company as a fully integrated seed-to-sale multi-state operator,
The acquisitions of the remaining entities located in Maryland, Nevada, and Delaware are at various stages of completion and subject
to each state’s laws governing the ownership transfer of cannabis licenses, which in the case of Delaware requires a modification
of current cannabis ownership laws to permit for-profit ownership. Meanwhile, the Company continues to expand these businesses
and maximize the Company’s revenue from rental income, management fees, and licensing royalties.
A goal in completing this transition from
a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale operations is to present a simpler,
more transparent financial picture of the full breadth of the Company’s efforts, with a clearer representation of the revenues,
earnings, and other financial metrics the Company has generated for its clients. The Company has played a key role in the successes
of these entities, from the securing of their cannabis licenses, to the development of facilities that are models of excellence,
to providing operational and corporate guidance. Accordingly, the Company believes it is well suited to own these facilities and
manage the continuing growth of their operations.
The Company has also created its own brands
of cannabis flower, concentrates, and precision-dosed products utilizing proprietary strains and formulations. These products
are developed by the Company in cooperation with state-licensed operators who meet the Company’s strict standards, including
all natural—not artificial or synthetic—ingredients. The Company licenses its brands and product formulations
only to certified manufacturing professionals who follow state cannabis laws and adhere to the Company’s precise scientific
formulations and trademarked product recipes.
The Company’s proprietary cannabis
genetics produce flowers and concentrates under the brand name Nature’s Heritage™, and cannabis-infused products under
the brand names Kalm Fusion®, in the form of chewable tablets and drink powder mixes, and the award-winning1 Betty’s
Eddies® brand of all natural fruit chews. Both cannabis-infused brands are top selling products in Maryland and Massachusetts2
and the Company intends to introduce additional products under these brands in 2021. The Company’s brand of hemp-infused
cannabidiol (“CBD”) products, Florance™, is distributed in the US and abroad.
The Company also has exclusive sublicensing
rights in certain states to distribute the Binske® line of cannabis products crafted from premium artisan ingredients, the
Healer™ line of medical full-spectrum cannabis tinctures, and the clinically tested medicinal cannabis strains developed
in Israel by global medical cannabis research pioneer Tikun Olam™. The Company intends to continue licensing and distributing
its brands as well as other top brands in the Company’s current markets and in additional legal markets worldwide.
In March 2020, the
World Health Organization declared the outbreak of COVID-19 a global pandemic. The spread of the virus in the United States and
the measures implemented to contain it—including business shutdowns, indoor capacity restrictions, social distancing, and
diminished travel—have negatively impacted the economy and have created significant volatility and disruption in financial
markets. Consequently, the Company’s implementation of its aforementioned Consolidation Plan has been delayed. Additionally,
while the cannabis industry has been deemed an essential business, and is not expected to suffer severe declines in revenue, the
Company’s business, operations, financial condition, and liquidity have been impacted, as further discussed in this report.
The Company’s stock is quoted on the
OTCQX market under the ticker symbol MRMD.
The Company was incorporated in Delaware in
January 2011 under the name Worlds Online Inc. Initially, the Company developed and managed online virtual worlds. By early 2014,
this line of business effectively ceased operating, and the Company pivoted into the legal cannabis industry.
1 Awards won by the
Company’s Betty’s Eddies® brand include LeafLink 2020 Industry Innovator, Explore Maryland Cannabis 2020 Edible
of the Year, and LeafLink 2019 Best Selling Medical Product.
2 Source: LeafLink Insights
2020.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (“GAAP”).
Certain
reclassifications have been made to prior periods’ data to conform to the current period presentation. These reclassifications
had no effect on reported income (losses) or cash flows.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of MariMed Inc. and the following majority-owned
subsidiaries:
SCHEDULE OF MAJORITY OWNED SUBSIDIARIES
Subsidiary:
|
|
Percentage
Owned
|
|
MariMed Advisors Inc.
|
|
|
100.0%
|
|
Mia Development LLC
|
|
|
89.5%
|
|
Mari Holdings IL LLC
|
|
|
100.0%
|
|
Mari Holdings MD LLC
|
|
|
97.4%
|
|
Mari Holdings NV LLC
|
|
|
100.0%
|
|
Hartwell Realty Holdings LLC
|
|
|
100.0%
|
|
iRollie LLC
|
|
|
100.0%
|
|
ARL Healthcare Inc.
|
|
|
100.0%
|
|
KPG of Anna LLC
|
|
|
100.0%
|
|
KPG of Harrisburg LLC
|
|
|
100.0%
|
|
MariMed Hemp Inc.
|
|
|
100.0%
|
|
MediTaurus LLC
|
|
|
70.0%
|
|
Intercompany
accounts and transactions have been eliminated.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts within the financial statements and disclosures thereof. Actual results could differ from these estimates
or assumptions.
Cash
Equivalents
The
Company considers all highly liquid investments with a maturity date of three months or less to be cash equivalents. The fair
values of these investments approximate their carrying values.
The
Company’s cash and cash equivalents are maintained with recognized financial institutions located in the United States.
In the normal course of business, the Company may carry balances with certain financial institutions that exceed federally insured
limits. The Company has not experienced losses on balances in excess of such limits and management believes the Company is not
exposed to significant risks in that regard.
Accounts
Receivable
Accounts
receivable consist of trade receivables and are carried at their estimated collectible amounts.
The
Company provides credit to its clients in the form of payment terms. The Company limits its credit risk by performing credit evaluations
of its clients and maintaining a reserve, if deemed necessary, for potential credit losses. Such evaluations include the review
of a client’s outstanding balances with consideration towards such client’s historical collection experience, as well
as prevailing economic and market conditions and other factors. Based on such evaluations, the Company maintained a reserve of
approximately $40.0 million and $39.7 million at December 31, 2020 and 2019, respectively. Please refer to Note 16 – Bad
Debts for further discussion on receivable reserves.
Inventory
Inventory
is carried at the lower of cost or net realizable value, with the cost being determined on a first-in, first-out (FIFO) basis.
The Company allocates a certain percentage of overhead cost to its manufactured inventory; such allocation is based on square
footage and other industry-standard criteria. The Company reviews physical inventory for obsolescence and/or excess and will record
a reserve if necessary. As of the date of this report, no reserve was deemed necessary.
Investments
Investments
are comprised of equity holding of private companies. These investments are recorded at fair value on the Company’s consolidated
balance sheet, with changes to fair value included in income. Investments are evaluated for permanent impairment and are written
down if such impairments are deemed to have occurred.
Revenue
Recognition
The
Company recognizes revenue in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification
(“ASC”) 606, Revenue from Contract with Customers, as amended by subsequently issued Accounting Standards Updates.
This revenue standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount
that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The recognition of
revenue is determined by performing the following consecutive steps:
|
●
|
Identify
the contract(s) with a customer;
|
|
●
|
Identify
the performance obligations in the contract(s);
|
|
●
|
Determine
the transaction price;
|
|
●
|
Allocate
the transaction price to the performance obligations in the contract(s); and
|
|
●
|
Recognize
revenue as the performance obligation is satisfied.
|
Additionally,
when another party is involved in providing goods or services to the Company’s clients, a determination is made as to who—the
Company or the other party—is acting in the capacity as the principal in the sale transaction, and who is merely the agent
arranging for goods or services to be provided by the other party.
The
Company is typically considered the principal if it controls the specified good or service before such good or service is transferred
to its client. The Company may also be deemed to be the principal even if it engages another party (an agent) to satisfy some
of the performance obligations on its behalf, provided the Company (i) takes on certain responsibilities, obligations and risks,
(ii) possesses certain abilities and discretion, or (iii) other relevant indicators of the sale. If deemed an agent, the Company
would not recognize revenue for the performance obligations it does not satisfy.
The
Company’s main sources of revenue are comprised of the following:
|
●
|
Product
Sales – direct sales of cannabis and cannabis-infused products by the Company’s dispensary and wholesale operations
in Massachusetts and Illinois, and sales of hemp and hemp-infused products by the Company’s hemp division. In 2019,
this division participated in one-time sales of acquired hemp seed inventory, as further explained in Note 17 – Related
Party Transactions. Future product sales are expected to include the Company’s planned cannabis-licensee acquisitions
in Maryland, Nevada, and Delaware (upon this state’s amendment to permit for-profit ownership of cannabis entities).
This revenue is recognized when products are delivered or at retail points-of-sale.
|
|
|
|
|
●
|
Real
Estate – rental income and additional rental fees generated from leasing of the Company’s state-of-the-art, regulatory-compliant
cannabis facilities to its cannabis-licensed clients. Rental income is generally a fixed amount per month that escalates over
the respective lease terms, while additional rental fees are based on a percentage of tenant revenues that exceed specified
amounts.
|
|
|
|
|
●
|
Management
– fees for providing the Company’s cannabis clients with comprehensive oversight of their cannabis cultivation,
production, and dispensary operations. These fees are based on a percentage of such clients’ revenue, and are recognized
after services have been performed.
|
|
|
|
|
●
|
Supply
Procurement – the Company maintains volume discounts with top national vendors of cultivation and production resources,
supplies, and equipment, which the Company acquires and resells to its clients or third parties within the cannabis industry.
The Company recognizes this revenue after the delivery and acceptance of goods by the purchaser.
|
|
|
|
|
●
|
Licensing
– revenue from the sale of precision-dosed, cannabis-infused products—such as Kalm Fusion®, Nature’s
Heritage™, and Betty’s Eddies®—to regulated dispensaries throughout the United States and Puerto Rico.
The recognition of this revenue occurs when the products are delivered.
|
Research
and Development Costs
Research
and development costs are charged to operations as incurred.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation, with depreciation recognized on a straight-line basis over the
shorter of the estimated useful life of the asset or the lease term, if applicable. When assets are retired or disposed, the cost
and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income. Repairs
and maintenance are charged to expense in the period incurred.
The
estimated useful lives of property and equipment are generally as follows: buildings and building improvements, forty
years; tenant improvements, the remaining duration of the related lease; furniture and fixtures, seven to ten years; machinery
and equipment, ten years. Land is not depreciated.
The
Company’s property and equipment are individually reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable from the undiscounted future cash flows of such asset over the anticipated
holding period. An impairment loss is measured by the excess of the asset’s carrying amount over its estimated fair value.
Impairment
analyses are based on management’s current plans, asset holding periods, and currently available market information. If
these criteria change, the Company’s evaluation of impairment losses may be different and could have a material impact to
the consolidated financial statements.
For
the years ended December 31, 2020 and 2019, based on the results of management’s impairment analyses, there were no impairment
losses.
Leases
The
consolidated financial statements reflect the Company’s adoption of ASC 842, Leases, as amended by subsequent accounting
standards updates, utilizing the modified retrospective transition approach which was applied to all of the Company’s leases
on the effective date of January 1, 2019.
ASC
842 is intended to improve financial reporting of leasing transactions. The most prominent change from previous accounting guidance
is the requirement to recognize right-of-use assets and lease liabilities on the consolidated balance sheet representing the rights
and obligations created by operating leases that extend more than twelve months in which the Company is the lessee. The Company
elected the package of practical expedients permitted under ASC 842. Accordingly, the Company accounted for its existing operating
leases that commenced before the effective date as operating leases under the new guidance without reassessing (i) whether the
contracts contain a lease, (ii) the classification of the leases (iii) the accounting for indirect costs as defined in ASC 842.
The
Company determines if an arrangement is a lease at inception. Right-of-use assets represent the Company’s right to use an
underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising
from the lease. Non-lease components within lease agreements are accounted for separately. Right-of-use assets and obligations
are recognized at the commencement date based on the present value of lease payments over the lease term, utilizing the Company’s
incremental borrowing rate. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over
the lease term.
Impairment
of Long-Lived Assets
The
Company evaluates the recoverability of its fixed assets and other assets in accordance with ASC 360-10-15, Impairment or Disposal
of Long-Lived Assets. Impairment of long-lived assets is recognized when the net book value of such assets exceeds their expected
cash flows, in which case the assets are written down to fair value, which is determined based on discounted future cash flows
or appraised values.
Fair
Value of Financial Instruments
The
Company follows the provisions of ASC 820, Fair Value Measurement, to measure the fair value of its financial instruments,
and ASC 825, Financial Instruments, for disclosures on the fair value of its financial instruments. To increase consistency
and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable
inputs. The three levels of fair value hierarchy defined by ASC 820 are:
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The
carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their
fair values due to the short maturity of these instruments.
The
fair value of option and warrant issuances are determined using the Black-Scholes pricing model and employing several inputs such
as the expected life of instrument, the exercise price, the expected risk-free interest rate, the expected dividend yield, the
value of the Company’s common stock on issuance date, and the expected volatility of such common stock. The following table
summarizes the range of inputs used by the Company during the prior two fiscal years:
SCHEDULE OF ASSUMPTIONS USED
|
|
2020
|
|
|
2019
|
|
Life of instrument
|
|
|
0.8
to 4.3 years
|
|
|
|
1.5
to 4.0 years
|
|
Volatility factors
|
|
|
1.059
to 1.180
|
|
|
|
1.039
to 1.106
|
|
Risk-free interest rates
|
|
|
0.26%
to 1.3%
|
|
|
|
1.42%
to 2.28%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
The
expected life of an instrument is calculated using the simplified method pursuant to Staff Accounting Bulletin Topic 14, Share-Based
Payment, which allows for using the mid-point between the vesting date and expiration date. The volatility factors are based
on the historical two-year movement of the Company’s common stock prior to an instrument’s issuance date. The risk-free
interest rate is based on U.S. Treasury rates with maturity periods similar to the expected instruments life on the issuance date.
The
Company amortizes the fair value of option and warrant issuances on a straight-line basis over the requisite service period of
each instrument.
Extinguishment
of Liabilities
The
Company accounts for extinguishment of liabilities in accordance with ASC 405-20, Extinguishments of Liabilities. When
the conditions for extinguishment are met, the liabilities are written down to zero and a gain or loss is recognized.
Stock-Based
Compensation
The
Company accounts for stock-based compensation using the fair value method as set forth in ASC 718, Compensation—Stock
Compensation, which requires a public entity to measure the cost of employee services received in exchange for an equity award
based on the fair value of the award on the grant date, with limited exceptions. Such value will be incurred as compensation expense
over the period an employee is required to provide service in exchange for the award, usually the vesting period. No compensation
cost is recognized for equity awards for which employees do not render the requisite service.
Income
Taxes
The
Company uses the asset and liability method to account for income taxes in accordance with ASC 740, Income Taxes.
Under this method, deferred income tax assets and liabilities are recorded for the future tax consequences of differences
between the tax basis and financial reporting basis of assets and liabilities, measured using enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance
to the extent management concludes it is more likely than not that the assets will not be realized. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that
includes the enactment date.
ASC
740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements
uncertain tax positions taken or expected to be taken on a tax return. The Company did not take any uncertain tax positions and
had no adjustments to unrecognized income tax liabilities or benefits for the years ended December 31, 2020 and 2019.
Related
Party Transactions
The
Company follows ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related
party transactions.
In
accordance with ASC 850, the Company’s financial statements include disclosures of material related party transactions,
other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business, as well
as transactions that are eliminated in the preparation of financial statements.
Comprehensive
Income
The
Company reports comprehensive income and its components following guidance set forth by ASC 220, Comprehensive Income,
which establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial
statements. There were no items of comprehensive income applicable to the Company during the period covered in the financial statements.
Earnings
Per Share
Earnings
per common share is computed pursuant to ASC 260, Earnings Per Share. Basic earnings per share is computed by dividing
net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share
is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus the weighted
average number of potentially dilutive securities during the period.
As
of December 31, 2020 and 2019, there were 26,722,918 and 18,051,357, respectively, of potentially dilutive securities in the form
of outstanding options and warrants. Also as of such dates, there were (i) $1.3 million and $10.0 million, respectively, of outstanding
convertible debentures payable, and (ii) $350,000 of outstanding convertible promissory notes in both years. All of these potentially
dilutive securities are convertible into common stock is based on either (i) a predetermined price, subject to adjustment, or
(ii) the market value of common stock on or about the future conversion date.
For
the year ended December 31, 2020, all such potentially dilutive securities were convertible into approximately 57.2 million
net shares of common stock, which were included in the number of weighted average common shares outstanding on a diluted basis,
and in the calculation of diluted net income per share for this period as shown in the statement of operations. For the year ended
December 31, 2019, the potentially dilutive securities had an anti-dilutive effect on earnings per share, and in accordance with
ASC 260, were excluded from the diluted net income per share calculations, resulting in identical basic and fully diluted net
income per share for this period.
Commitments
and Contingencies
The
Company follows ASC 450, Contingencies, which requires the Company to assess the likelihood that a loss will be incurred
from the occurrence or non-occurrence of one or more future events. Such assessment inherently involves an exercise of judgment.
In assessing possible loss contingencies from legal proceedings or unasserted claims, the Company evaluates the perceived merits
of such proceedings or claims, and of the relief sought or expected to be sought.
If
the assessment of a contingency indicates that it is probable that a material loss will be incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material,
would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which
case the guarantees would be disclosed.
While
not assured, management does not believe, based upon information available at this time, that a loss contingency will have material
adverse effect on the Company’s financial position, results of operations or cash flows.
Beneficial
Conversion Features on Convertible Debt
Convertible
instruments that are not bifurcated as a derivative pursuant to ASC 815, Derivatives and Hedging, and not accounted for
as a separate equity component under the cash conversion guidance are evaluated to determine whether their conversion prices create
an embedded beneficial conversion feature at inception, or may become beneficial in the future due to potential adjustments.
A
beneficial conversion feature is a nondetachable conversion feature that is “in-the-money” at the commitment date.
The in-the-money portion, also known as the intrinsic value of the option, is recorded in equity, with an offsetting discount
to the carrying amount of convertible debt to which it is attached. The discount is amortized to interest expense over the life
of the debt with adjustments to amortization upon full or partial conversions of the debt.
Risk
and Uncertainties
The
Company is subject to risks common to companies operating within the legal and medical marijuana industries, including, but not
limited to, federal laws, government regulations and jurisdictional laws.
Noncontrolling
Interests
Noncontrolling
interests represent third-party minority ownership of the Company’s consolidated subsidiaries. Net income attributable to
noncontrolling interests is shown in the consolidated statements of operations; and the value of net assets owned by noncontrolling
interests are presented as a component of equity within the balance sheets.
Off
Balance Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
Going
Concern
In
connection with the preparation of its financial statements for the years ended December 31, 2020 and 2019, the Company’s
management evaluated the Company’s ability to continue as a going concern in accordance with the ASU 2014-15, Presentation
of Financial Statements–Going Concern (Subtopic 205-40), which requires an assessment of relevant conditions or events,
considered in the aggregate, that are known or reasonably knowable by management on the issuance dates of the financial statements
which indicated the probable likelihood that the Company will be unable to meet its obligations as they become due within one
year after the issuance date of the financial statements.
As
part of its evaluation, management assessed known events, trends, commitments, and uncertainties, which included the profitability
of the Company and the cash flow generated by its operations, the amount of capital recently and/or in the process of being raised,
the current level of investment within the cannabis industry, the stock price movement of public cannabis companies, the actions
and/or financial results of certain bellwether cannabis companies, the measure of cannabis investor confidence, and the changes
to state laws with respect to adult-use recreational and medical cannabis use.
For
the year ended December 31, 2020, operating income increased to approximately $14.5 million
compared to an operating loss of approximately $41.5 million
in 2019. In addition, working capital at December 31, 2020 improved by approximately $27.2 million
from the previous year.
Subsequent
to December 31, 2020, the Company consummated a financing transaction for up to $46.0 million of proceeds in exchange for newly-designated
Series C convertible preferred stock of the Company and warrants to purchase the Company’s common stock. Initial proceeds
of $23.0 million received in March 2021 were used to pay down debt, and will be used to upgrade certain of the Company’s
owned and managed facilities. The balance of the available proceeds will fund the completion of the Company’s Consolidation
Plan. This transaction is further discussed in Note 22 – Subsequent Events.
Based
on its evaluation, coupled with the aforementioned operating results and financing transaction, management believes that it has
completely mitigated the circumstance that led to a doubt with respect to the Company’s ability to continue as a going concern
which existed at the time of the filing of the Company’s prior year’s report.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements, and does not believe the future adoption
of any such pronouncements will have a material impact on its financial condition or the results of its operations.
NOTE
3 – ACQUISITIONS
KPG
of Anna LLC and KPG of Harrisburg LLC
Effective
October 1, 2019, the Illinois Department of Financial and Professional Regulation approved the Company’s acquisition of
(i)100% of the ownership interests of KPG of Anna LLC and KPG of Harrisburg LLC, the Company’s two cannabis-licensed clients
that operate medical marijuana dispensaries in the state of Illinois (both entities collectively, the “KPGs”), and
(ii) the 40% ownership interests not already owned by the Company of Mari Holdings IL LLC, the Company’s subsidiary that
owns the real estate in which the KPGs’ dispensaries are located (“Mari-IL”). On such date, 1,000,000 shares
of the Company’s common stock, representing the entire purchase price, were issued to the sellers of the KPGs and Mari-IL,
and these entities became wholly-owned subsidiaries of the Company.
The
acquisition was accounted for in accordance with ASC 805. The following table summarizes the allocation of the purchase price
to the fair value of the assets acquired and liabilities assumed on the acquisition date:
SCHEDULE OF FAIR VALUE OF ASSETS ACQUIRED ON ACQUISITION
Cash and cash equivalents
|
|
$
|
443,980
|
|
Inventory
|
|
|
113,825
|
|
Intangibles
|
|
|
2,067,727
|
|
Minority interests
|
|
|
138,356
|
|
Accounts payable
|
|
|
(642,033
|
)
|
Accrued expenses
|
|
|
(186,005
|
)
|
Due to third parties
|
|
|
(1,020,850
|
)
|
Total fair value of consideration
|
|
$
|
915,000
|
|
Since
the date of acquisition, the KPGs have contributed approximately $30.7 million of revenue and $6.8 million of pretax income.
Consolidated
unaudited pro forma results of operations for the Company are presented below for the year ended December 31, 2019 assuming this
October 2019 acquisition had occurred at January 1, 2019, the beginning of the reporting period of these financial statements.
Consolidated results are unchanged for the year ended December 31, 2020.
SCHEDULE OF UNAUDITED PRO FORMA RESULTS OF OPERATIONS
Total revenues
|
|
$
|
48,444,052
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(81,705,403
|
)
|
|
|
|
|
|
Net income (loss) per share
|
|
$
|
(0.39
|
)
|
Pro
forma financial information is not necessarily indicative of the Company’s actual results if the transaction had been completed
during the periods reflected above, nor is it necessarily an indication of future operating results. Amounts do not include any
operating efficiencies or costs savings that the Company would have been able to achieve.
The
Harvest Foundation LLC
In
August 2019, the Company entered into a purchase agreement to acquire 100% of the ownership interests of The Harvest Foundation
LLC (“Harvest”), the Company’s cannabis-licensed client in the state of Nevada. The acquisition is conditioned
upon legislative approval of the transaction. At this time, the state has paused the processing of cannabis license transfers,
without indicating when it will resume. Upon the resumption of these activities and the ensuing approval by the state, the Company
expects to consummate this transaction whereby the operations of Harvest will be consolidated into the Company’s financial
statements.
The
purchase price is comprised of the issuance of (i) 1,000,000
shares of the Company’s common stock,
in the aggregate, to two owners of Harvest, which as a good faith deposit, were issued upon execution of the purchase agreement,
(ii) $1.2
million of the Company’s common
stock at closing, based on the closing price of the common stock on the day prior to legislative approval of the transaction,
and (iii) warrants to purchase 400,000
shares of the Company’s common stock
at an exercise price equal to the closing price of the Company’s common stock on the day prior to legislative approval of
the transaction. The issued shares were recorded at par value. Such shares are restricted and will be returned to the Company
in the event the transaction does not close by a date certain.
Kind
Therapeutics USA Inc.
In the fall of 2016, the members of
Kind Therapeutics USA Inc., the Company’s cannabis-licensed client in Maryland that holds licenses for the cultivation,
production, and dispensing of medical cannabis (“Kind”), and the Company agreed to a partnership/joint venture whereby
Kind would be owned 70% by the Company and 30% by the members of Kind, subject to approval by the Maryland Medical Cannabis Commission
(“MMCC”). Prior to finalizing the documents confirming the partnership/joint venture, in December 2018, the Company
and the members of Kind negotiated and entered into a memorandum of understanding (“MOU”) for the Company
to acquire 100%
of the membership interests of Kind. The MOU provides for a total purchase price of $6.3
million in cash, 2,500,000
shares of the Company’s common stock,
and other consideration. The acquisition is subject to approval by the MMCC, which will be applied for following the resolution
of the litigation with Kind discussed below.
Also
in December 2018, (i) MariMed Advisors Inc., the Company’s wholly owned subsidiary, and Kind entered into a management services
agreement to provide Kind with comprehensive management services in connection with the business and operations of Kind
(“the MSA”), and (ii) Mari Holdings MD LLC, the Company’s majority-owned subsidiary, entered into a 20-year
lease with Kind for Kind’s
utilization of the Company’s 180,000
square foot cultivation and production
facility in Hagerstown, MD (“the Lease”), which the Company purchased, designed, and developed for occupancy
and use by Kind commencing in late 2017. Additionally, in October 2019, Mari Holdings MD LLC purchased a 9,000
square foot building in Anne Arundel County,
MD, which is currently under constructions, for the development of a dispensary which would be leased to Kind.
In 2019, the members of Kind sought to
renegotiate the terms of the MOU and has subsequently sought to renege on both the original partnership/joint venture and the
MOU. The Company engaged with Kind in good faith in an attempt to reach updated terms acceptable to both parties, however
Kind failed to reciprocate in good faith, resulting in an impasse. Incrementally, both parties through counsel further sought
to resolve the impasse, however such initiative resulted in both parties commencing legal proceedings. As a result, the
consummation of this acquisition has been delayed and may not ultimately be completed. The litigation is further discussed in
Note 21 – Commitments and Contingencies.
MediTaurus
LLC
In
May 2019, the Company entered into a purchase agreement to acquire MediTaurus LLC (“MediTaurus”), a company formed
and owned by Jokubas Ziburkas PhD, a neuroscientist and leading authority on CBD and its interactions with the brain and endocannabinoid
system. MediTaurus currently operates in the United States and Europe and has developed proprietary CBD formulations sold under
its Florance™ brand.
Pursuant
to the purchase agreement, the Company acquired 70% of MediTaurus on June 1, 2019. The purchase price was $2.8 million, comprised
of cash payments totaling $720,000 and 520,000 shares of the Company’s common stock valued at $2,080,000. The Company expects
to complete the acquisition of the remining 30% of MediTaurus in April 2021.
The
acquisition was accounted for in accordance with ASC 10. The following table summarizes the allocation, adjusted in September
2019, of the purchase price to the fair value of the assets acquired and liabilities assumed on the acquisition date:
SCHEDULE OF FAIR VALUE OF ASSETS ACQUIRED ON ACQUISITION
Cash and cash equivalents
|
|
$
|
64,196
|
|
Accounts receivable
|
|
|
5,362
|
|
Inventory
|
|
|
519,750
|
|
Goodwill
|
|
|
2,662,669
|
|
Accounts payable
|
|
|
(777
|
)
|
Total value of MediTaurus
|
|
|
3,251,200
|
|
Noncontrolling interests in MediTaurus
|
|
|
(975,360
|
)
|
Total fair value of consideration
|
|
$
|
2,275,840
|
|
Based
on a valuation of MediTaurus in late 2019, the goodwill recorded in connection with the transaction was written off.
AgriMed
Industries of PA LLC
In
July 2018, the Company entered into a purchase agreement to acquire 100% of the ownership interests of AgriMed Industries of PA
LLC (“AgriMed”), an entity that holds a license from the state of Pennsylvania for the cultivation of cannabis. The
purchase price was comprised of $8 million, payable in stock and cash, and the assumption of certain liabilities of AgriMed. In
February 2019, the Company commenced legal proceedings against AgriMed seeking specific performance of the purchase agreement.
In
May 2019, the dispute between the parties was resolved through the cash payment to the Company of $3.1 million and other good
and valuable consideration, in exchange for the Company relinquishing its rights under the purchase agreement and releasing its
claims against AgriMed. The net amount of approximately $2,949,000, representing the cash payment less legal fees and write-offs
of assets and supplies, was recorded in Other Non-Operating Income in the Company’s consolidated statement of operations
for the year ended December 31, 2019.
NOTE
4 – INVESTMENTS
At
December 31, 2020 and 2019, the Company’s investments were comprised of the following:
SCHEDULE OF INVESTMENTS
|
|
2020
|
|
|
2019
|
|
Current investments:
|
|
|
|
|
|
|
|
|
Flowr Corp. (formerly Terrace Inc.)
|
|
$
|
1,357,193
|
|
|
$
|
1,449,144
|
|
Total current investments
|
|
$
|
1,357,193
|
|
|
$
|
1,449,144
|
|
|
|
|
|
|
|
|
|
|
Non-current investments:
|
|
|
|
|
|
|
|
|
MembersRSVP LLC
|
|
|
1,165,788
|
|
|
|
1,066,975
|
|
Chooze Corp.
|
|
|
-
|
|
|
|
257,686
|
|
Total non-current investments
|
|
|
1,165,788
|
|
|
|
1,324,661
|
|
Total investments
|
|
$
|
2,522,981
|
|
|
$
|
2,773,805
|
|
Flowr
Corp. (formerly Terrace Inc.)
In
May 2019, the Company issued 500,000 shares of its common stock, valued at $1.59 million on the date of issuance, to purchase
an 8.95% interest in Terrace Inc. (“Terrace”), a Canadian entity that develops and acquires international cannabis
assets. The Company has no board representation, nor does it have the ability to exert operational or financial control over the
entity.
In
November 2019, the common stock of Terrace commenced public trading on the Toronto Stock Venture Exchange. In accordance with
ASC 321, Investments – Equity Securities, this investment is carried at fair value, with changes to fair value recognized
in net income. Prior to Terrace becoming publicly traded, the Company had elected the measurement alternative to value this equity
investment without a readily determinable fair value.
In
December 2020, Flowr Corp. (TSX.V: FLWR; OTC: FLWPF), a Toronto-headquartered cannabis company with operations in Canada, Europe,
and Australia (“Flowr”), acquired Terrace. Under the terms of the deal, each shareholder of Terrace received 0.4973
of a share in Flowr for each Terrace share held.
During
the years ended December 31, 2020 and 2019, the decrease in fair value of this investment of approximately $92,000 and $141,000,
respectively, was included in Change In Fair Value Of Investments on the statement of operations.
MembersRSVP
LLC
In
August 2018, the Company invested $300,000 and issued 378,259 shares of its common stock, valued at approximately $915,000, in
exchange for a 23% ownership in MembersRSVP LLC (“MRSVP”), an entity that has developed cannabis-specific customer
relationship management software, branded under the name Sprout.
During
the years ended December 31, 2020 and 2019, the investment was accounted for under the equity method. Accordingly, the Company
recorded earnings of approximately $99,000 in 2020, and a charge of approximately $105,000 in 2019, based on the Company’s
equity in MRSVP’s net income and losses during such periods. Since the Company’s initial investment in 2018 of approximately
$1,215,000, the Company had recorded cumulative equity in net losses of approximately $49,000, reducing the carrying value of
the investment to approximately $1,166,000 at December 31, 2020.
In
January 2021, the Company and MRSVP entered into an agreement whereby the Company assigned and transferred membership interests
comprising an 11% ownership in MRSVP in exchange for a release from all further obligation by the Company to make future investments
or payments and certain other non-monetary consideration. Following the interest transfer, the Company’s ownership interest
in MRSVP was reduced to 12% on a fully diluted basis.
As
part of the agreement, the Company relinquished its right to appoint a member to the board of MRSVP. In light of the Company no
longer having the ability to exercise significant influence over MRSVP, the investment shall no longer be accounted for under
the equity method—the Company’s share of MRSVP’s future earnings or losses shall not be recorded, and the earnings
and losses previously recorded will remain part of the carrying amount of the investment.
Chooze
Corp.
In
January 2019, the entire principal and accrued interest balance of a note receivable of approximately $258,000 from Chooze Corp.,
a private company operating in the cannabis industry (“Chooze”), was converted into a 2.7% equity interest in Chooze.
In accordance with ASC 321, the Company elected the measurement alternative to value this equity investment without a readily
determinable fair value. Accordingly, the investment was carried at its cost until June 2020 when the investment was fully reserved
due to the Company’s determination that the investment was impaired. This reserve in 2020 of approximately $258,000 was
included in Change In Fair Value Of Investments on the statement of operations.
GenCanna
Global Inc.
In
February 2019, the Company converted $30.0 million of convertible debentures purchased from GenCanna Global Inc., a Kentucky-based
cultivator, producer, and distributor of hemp and CBD (“GenCanna”), plus unpaid accrued interest through the conversion
date of approximately $229,000, into common stock of GenCanna equal to a 33.5% ownership interest in GenCanna on a fully diluted
basis.
In
late January 2020, an involuntary bankruptcy proceeding under Chapter 11 was filed against GenCanna USA, GenCanna’s wholly-owned
operating subsidiary, with the U.S. Bankruptcy Court in the Eastern District of Kentucky (the “Bankruptcy Court”).
In February 2020, GenCanna USA, under pressure from certain of its creditors including MGG Investment Group LP, GenCanna’s
senior lender (“MGG”), agreed to convert the involuntary bankruptcy proceeding into a voluntary Chapter 11 proceeding.
In addition, GenCanna and GenCanna USA’s subsidiary, Hemp Kentucky LLC (collectively with GenCanna and GenCanna USA, the
“GenCanna Debtors”), filed voluntary petitions under Chapter 11 in the Bankruptcy Court.
As
the aforementioned proceedings had occurred prior to the Company’s filing of its financial statements for the year ended
December 31, 2019, the Company recorded a charge to net income of approximately $30.2 million in December 2019, reflected in Earnings
(Losses) on Equity Investments on the statement of operations, which reduced the carrying value of this investment to zero.
Please refer to Note 21 – Commitments and Contingencies for additional discussion of GenCanna’s bankruptcy
proceedings.
Iconic
Ventures Inc.
In
December 2018, the Company purchased a 10% ownership interest in Iconic Ventures Inc., a private company that had created unique
solution for cannabinoid vaporization (“Iconic”), for an aggregate cash payment of $500,000. The Company was not given
any board representation, nor did it have the ability to exert operational or financial control over the entity.
In
2019, the Company wrote off the investment after an impairment review. The charge of $500,000 was included in Change In Fair
Value Of Investments on the statement of operations.
Binske®
In
July 2019, the Company entered into a licensing agreement for the exclusive manufacturing and distribution in seven eastern U.S.
states of the Binske® portfolio of products, a brand known for utilizing best-in-class proprietary strains and
craft ingredients in its edibles, concentrates, vaporizers, and topicals. In consideration for the license and other rights, the
Company agreed to pay a royalty of 10.0% to 12.5% of gross revenue, as defined, derived from the sale of Binske® products,
subject to an annual minimum royalty. No gross revenue was generated as of December 31, 2020 and 2019.
NOTE
5 – DEFERRED RENTS RECEIVABLE
The
Company is the lessor under several operating leases which contain rent holidays, escalating rents over time, options to renew,
requirements to pay property taxes, insurance and/or maintenance costs, and contingent rental payments based on a percentage of
monthly tenant revenues. The Company is not the lessor under any finance leases.
The
Company recognizes fixed rental receipts from such lease agreements on a straight-line basis over the expected lease term. Differences
between amounts received and amounts recognized are recorded under Deferred Rents Receivable on the balance sheet. Contingent
rentals are recognized only after tenants’ revenues are finalized and if such revenues exceed certain minimum levels.
The
Company leases the following owned properties:
|
●
|
Delaware
– a 45,000 square foot facility purchased in September 2016 and developed into a cannabis cultivation, processing, and
dispensary facility which is leased to a cannabis-licensed client under a triple net lease that commenced in 2017 and expires
in 2035.
|
|
|
|
|
●
|
Maryland
– a 180,000 square foot former manufacturing facility purchased in January 2017 and developed by the Company into a
cultivation and processing facility which is leased to a licensed cannabis client under a triple net lease that commenced
2018 and expires in 2037.
|
|
|
|
|
●
|
Massachusetts
– a 138,000 square foot industrial property of which approximately half of the available square footage is leased to
a non-cannabis manufacturing company under a lease that commenced in 2017 and expires in 2022.
|
|
|
|
|
●
|
Illinois
– two 3,400 square foot free-standing retail dispensaries in the cities of Anna and Harrisburg and leased to the KPGs,
each under a 20-year lease that commenced in 2018. With the acquisition of the KPGs as disclosed in Note 3 – Acquisitions,
this lease was eliminated upon the consolidation of the KPGs in October 2019. Accordingly, the rental receipts on such leases
have been removed from the table of future minimum rental receipts below.
|
The
Company subleases the following property:
|
●
|
Delaware
– 4,000 square feet of retail space in a multi-use building space which the Company developed into a cannabis dispensary
and is subleased to its cannabis-licensed client under a under a triple net lease expiring in 2021 with a five-year option
to extend.
|
As
of December 31, 2020 and 2019, cumulative fixed rental receipts under such leases approximated $13.9
million and $9.5
million, respectively, compared to revenue
recognized on a straight-line basis of approximately $15.8
million and $11.3
million. Accordingly, the deferred rents
receivable balances at December 31, 2020 and 2019 approximated $1.9
million and $1.8
million, respectively.
Future
minimum rental receipts for non-cancelable leases and subleases as of December 31, 2020 were:
SCHEDULE OF FUTURE MINIMUM RENTAL RECEIPTS FOR NON-CANCELABLE LEASES AND SUBLEASES
2021
|
|
$
|
4,667,497
|
|
2022
|
|
|
4,590,656
|
|
2023
|
|
|
4,292,769
|
|
2024
|
|
|
4,348,027
|
|
2025
|
|
|
4,412,299
|
|
Thereafter
|
|
|
39,578,055
|
|
Total
|
|
$
|
61,889,303
|
|
In
February 2021, the Company entered into a five-year
lease agreement for a 12,000
square foot premises located in Wilmington,
DE which the Company intends to develop into a cannabis production facility with offices, and sublease to its cannabis-licensed
client in this state. The lease contains an option to negotiate an extension at the end of the lease term.
NOTE
7 – NOTES RECEIVABLE
At
December 31, 2020 and 2019, notes receivable were comprised of the following:
SCHEDULE OF NOTES RECEIVABLE
|
|
2020
|
|
|
2019
|
|
First State Compassion Center
|
|
$
|
468,985
|
|
|
$
|
527,261
|
|
Healer LLC
|
|
|
899,226
|
|
|
|
846,985
|
|
High Fidelity Inc.
|
|
|
254,919
|
|
|
|
252,873
|
|
Maryland Health & Wellness Center Inc.
|
|
|
-
|
|
|
|
323,526
|
|
Total notes receivable
|
|
|
1,623,130
|
|
|
|
1,950,645
|
|
Notes receivable, current portion
|
|
|
658,122
|
|
|
|
311,149
|
|
Notes receivable, less current portion
|
|
$
|
965,008
|
|
|
$
|
1,639,496
|
|
The
Company’s cannabis-licensed client in Delaware, First State Compassion Center, issued a 10-year promissory note to the Company
in May 2016 in the amount of $700,000 bearing interest at a rate of 12.5% per annum, as amended. The monthly payments of approximately
$10,000 will continue through April 2026, at which time the note will be fully paid down. At December 31, 2020 and 2019, the current
portion of this note was approximately $66,000 and $58,000, respectively, and was included in Notes Receivable, Current Portion
on the respective balance sheets.
From
August 2018 to June 2019, the Company loaned an aggregate of $800,000
to Healer LLC (“Healer”),
an entity that provides cannabis education, dosage programs, and products developed by Dr. Dustin Sulak, an integrative medicine
physician and nationally renowned cannabis practitioner. Healer issued promissory notes to the Company for the aggregate amount
loaned that bear interest at 6%
per annum, with principal
and interest payable on maturity dates three years from the respective loan dates. At
December 30, 2020, the current portion of this loan approximated $337,000.
No
portion was current at December 31, 2019.
In March 2021, the Company was issued a revised promissory note from Healer replacing the previous promissory notes on these
loans as discussed in Note 22 – Subsequent Events.
In
August 2019, the Company loaned $250,000 to High Fidelity Inc., a company that owns and operates two seed-to sale medical marijuana
facilities in the state of Vermont and produces its own line of CBD products. The note bears interest at a rate of 10.0% per annum,
with interest-only month payments through its extended maturity in June 2021.
In
January 2019, the Company provided Maryland Health & Wellness Center Inc. (“MHWC”), an entity that has been pre-approved
by the state of Maryland for a cannabis dispensing license, with a $300,000 construction loan bearing interest at a rate of 8%
per annum. In June 2020, MHWC repaid the principal and accrued interest thereon, at which time the parties agreed to terminate
their business relationship and release each other from all other previously executed agreements.
NOTE
8 – INVENTORY
At
December 31, 2020 and 2019, inventory was comprised of the following:
SCHEDULE OF INVENTORY
|
|
2020
|
|
|
2019
|
|
Plants
|
|
$
|
3,352,425
|
|
|
$
|
395,167
|
|
Ingredients and other raw materials
|
|
|
176,338
|
|
|
|
225,620
|
|
Work-in-process
|
|
|
468,377
|
|
|
|
80,476
|
|
Finished goods
|
|
|
2,833,431
|
|
|
|
518,166
|
|
Total inventory
|
|
$
|
6,830,571
|
|
|
$
|
1,219,429
|
|
The anticipated year-over-year increase
of inventory is based on the Company’s implementation of its aforementioned Consolidation Plan whereby it is transitioning
from a management and advisory firm in the cannabis space, to a cannabis licensee and direct owner of cannabis cultivation, manufacturing,
and dispensary operations.
NOTE
9 – PROPERTY AND EQUIPMENT
At
December 31, 2020 and 2019, property and equipment consisted of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
|
|
2020
|
|
|
2019
|
|
Land
|
|
$
|
3,988,810
|
|
|
$
|
3,887,710
|
|
Buildings and building improvements
|
|
|
29,309,856
|
|
|
|
27,063,235
|
|
Tenant improvements
|
|
|
8,844,974
|
|
|
|
7,762,991
|
|
Furniture and fixtures
|
|
|
619,880
|
|
|
|
299,645
|
|
Machinery and equipment
|
|
|
4,620,924
|
|
|
|
4,086,691
|
|
Construction in progress
|
|
|
3,140,807
|
|
|
|
2,827,940
|
|
|
|
|
50,525,251
|
|
|
|
45,928,212
|
|
Less: accumulated depreciation
|
|
|
(4,888,722
|
)
|
|
|
(3,135,843
|
)
|
Property and equipment, net
|
|
$
|
45,636,529
|
|
|
$
|
42,792,369
|
|
During
the years ended December 31, 2020 and 2019, additions to property and equipment approximated $4.7
million and $9.7
million, respectively.
The
2020 additions were primarily comprised of (i) construction in Mt. Vernon, IL, and (ii)
machinery and equipment purchases for facilities in Massachusetts, Maryland, Illinois, and Delaware. The 2019 additions consisted
primarily of (i) the commencement of construction in Milford, DE and Annapolis, MD, (ii) the continued buildout of properties
in Hagerstown, MD, New Bedford, MA, and Middleborough, MA, and (ii) improvements to the Wilmington, DE and Las Vegas, NV properties.
During
2020, the Company disposed of an asset with a cost of approximately $91,000 and accumulated depreciation through the disposal
date of approximately $6,000. The loss on disposal of approximately $85,000 is reflected in Other Non-Operating Expenses
in the statement of operations at September 30, 2020. There were no disposals in 2019.
The
2020 and 2019 construction in progress balances of approximately $3.1
million and $2.8
million, respectively,
consisted of the commencement of construction of properties in Milford, DE and Annapolis, MD.
Depreciation
expense for the year ended December 31, 2020 and 2019 approximated $1.8 million and $1.0 million, respectively.
NOTE
10 – INTANGIBLES
At
December 31, 2020 and 2019, intangible assets were comprised of (i) the carrying value of cannabis license fees, and (i) goodwill
arising from the Company’s acquisition of the KPGs and Mari-IL as discussed in Note 3 – Acquisitions.
The
Company’s cannabis licenses are issued from the states of Illinois and Massachusetts and require the payment of annual fees.
These fees, comprised of a fixed component and a variable component based on the level of operations, are capitalized and amortized
over the respective twelve-month periods. At December 31, 2020 and 2019, the carrying value of these cannabis licenses approximated
$161,000 and $296,000, respectively.
The
goodwill associated with the acquisition of the KPGs and Mari-IL is reviewed on a quarterly basis for impairment. Since the date
of acquisition, the KPGs have contributed approximately $30.7 million of revenue and $6.8 million of pretax income. Based on this
and other factors, the goodwill of approximately $2.1 million at December 31, 2020 and 2019 was deemed to be unimpaired.
NOTE
11 – DEBT
Mortgages
Payable
At
December 31, 2020 and 2019, mortgage balances, including accrued but unpaid interest, were comprised of the following:
SCHEDULE OF MORTGAGES PAYABLE
|
|
2020
|
|
|
2019
|
|
Bank of New England – Massachusetts properties
|
|
$
|
12,834,090
|
|
|
$
|
4,825,226
|
|
Bank of New England – Delaware property
|
|
|
1,575,658
|
|
|
|
1,682,275
|
|
DuQuoin State Bank – Illinois properties
|
|
|
814,749
|
|
|
|
829,229
|
|
South Porte Bank – Illinois property
|
|
|
906,653
|
|
|
|
-
|
|
Total mortgages payable
|
|
|
16,131,150
|
|
|
|
7,336,730
|
|
Mortgages payable, current portion
|
|
|
(1,387,014
|
)
|
|
|
(223,888
|
)
|
Mortgages payable, less current portion
|
|
$
|
14,744,136
|
|
|
$
|
7,112,842
|
|
In
November 2017, the Company entered into a 10-year mortgage agreement with Bank of New England in the amount of $4,895,000 (the
“Initial Mortgage”) for the purchase of a 138,000 square foot industrial property in New Bedford, Massachusetts, within
which the Company has built a 70,000 square foot cannabis cultivation and processing facility. Pursuant to the Initial Mortgage,
the Company made monthly payments of (i) interest-only from the mortgage date through May 2019 at a rate equal to the prime rate
plus 2%, with a floor of 6.25% per annum, and (ii) principal and interest payments from May 2019 to July 2020 at a rate equal
to the prime rate on May 2, 2019 plus 2%, with a floor of 6.25% per annum. In July 2020, at which time the Initial Mortgage had
a remaining principal balance of approximately $4.8 million, the parties consummated an amended and restated mortgage agreement,
secured by the Company’s properties in New Bedford and Middleboro in the amount of $13.0 million bearing interest at a rate
of 6.5% per annum that matures in August 2025 (the “Refinanced Mortgage”). Proceeds from the Refinanced Mortgage were
used to pay down the Initial Mortgage and approximately $7.2 million of promissory notes as further described below. The outstanding
principal balance of the Refinanced Mortgage approximated $12.8 million on December 31, 2020, of which approximately $335,000
was current. The outstanding principal balance of the Initial Mortgage approximated $4.8 million at December 31, 2019, of which
approximately $94,000 was current.
The
Company maintains another mortgage with Bank of New England for the 2016 purchase of a 45,070 square foot building in Wilmington,
Delaware which was developed into a cannabis seed-to-sale facility and is currently leased to the Company’s cannabis-licensed
client in that state. The mortgage matures in 2031 with monthly principal and interest payments at a rate of 5.25% per annum through
September 2021, and thereafter the rate adjusting every five years to the then prime rate plus 1.5% with a floor of 5.25% per
annum. At December 31, 2020 and 2019, the outstanding principal balance on this mortgage was approximately $1,576,000 and $1,682,000,
respectively, of which approximately $114,000 and $105,000, respectively, was current.
In
May 2016, the Company entered into a mortgage agreement with DuQuoin State Bank (“DSB”) for the purchase of two properties
which the Company developed into two 3,400 square foot free-standing retail dispensaries in Illinois. On May 5th of
each year, this mortgage is due to be repaid unless it is renewed for another year at a rate determined by DSB’s executive
committee. The mortgage was renewed in May 2020 at a rate of 6.75% per annum. At December 31, 2020 and 2019, the outstanding principal
balance on this mortgage was approximately $815,000 and $829,000 respectively, of which approximately $31,000 and $24,000, respectively,
was current.
In
February 2020, the Company entered into a mortgage agreement with South Porte Bank for the purchase and development of a property
in Mt. Vernon, IL. Pursuant to two amendments to the mortgage agreement, the Company is making interest-only monthly payments
at a rate of 5.5% per annum through amended maturity date of March 31, 2021.
Notes
Payable
In
February 2020, pursuant to an exchange agreement as further described in Note 13 – Mezzanine Equity, the Company
issued two promissory notes in the aggregate principal amount of approximately $4.4 million, bearing interest at 16.5% per annum
and maturing in August 2021 (the “$4.4M Notes”), in exchange for a loan in the same amount. The Company has the right
to extend the maturity date through February 2022 upon payment of an extension fee equal to 2.5% of the principal amount of the
loan. As of December 31, 2020, no principal payments were made on the $4.4M Notes and unpaid accrued interest through such date
approximated $186,000.
In
June 2019, the Company and MariMed Hemp, its wholly-owned subsidiary, issued a secured promissory note in the principal amount
of $10.0 million (the “$10M Note”) to an unaffiliated party (the “Noteholder”). The proceeds from the
$10M Note were used to finance a portion of the purchases of hemp seed inventory that was sold to GenCanna (the “Seed Transactions”)
as further discussed in Note 20 – Related Party Transactions. The $10M Note provided for the repayment of principal
plus a payment of $1.5 million (the “$1.5M Payment”) on the maturity date of January 31, 2020. Such payment was charged
to interest expense over the life of the $10M Note.
As
part of the $10M Note transaction, the Company issued three-year warrants to purchase 375,000 shares of common stock at an exercise
price of $4.50 per share to the Noteholder. The fair value of these warrants on the issuance date of approximately $601,000 was
recorded as a discount to the $10M Note. Approximately $523,000 of the warrant discount was amortized to interest expense in 2019,
with the remainder in January 2020. Accordingly, the carrying value of the $10M Note approximated $9.9 million at December 31,
2019.
The
Company entered into an amendment agreement with the Noteholder in February 2020, whereby the Company and MariMed Hemp issued
an amended and restated promissory note maturing in June 2020 in the principal amount of $11,500,000 (the “$11.5M Note”),
comprised of the principal amount of the $10M Note and the $1.5M Payment. The $11.5M Note bore interest at a rate of 15% per annum,
requiring periodic interest payments and minimum amortization payments of $3,000,000 in the aggregate, which the Company made
in the first half of 2020.
The
Company entered into a second amendment agreement with the Noteholder in June 2020, whereby (i) $352,000
of outstanding principal of the $11.5M
Note was converted into 1,900,000
shares of the Company’s common stock
(which did not result in a material extinguishment gain or loss as the conversion price was near the price
of the Company’s common stock on the agreement date), and (ii) the Company and MariMed Hemp issued a second amended
and restated promissory note in the principal amount of approximately $8.8
million (the “$8.8M Note”),
comprised of the outstanding principal and unpaid interest balances of the $11.5M Note, plus an extension fee of approximately
$330,000.
In addition, the Company issued three-year
warrants to the Noteholder to purchase
750,000
shares of common stock at an exercise
price of $0.50
per share. The fair value of these warrants
on the issuance date of approximately $66,000
was recorded as a discount to the $8.8M
Note, to be amortized to interest expense over the life of the $8.8M Note.
The
$8.8M Note bears interest at a rate of 15% per annum, matures in June 2022, and required a minimum amortization payment of $4,000,000
in July 2020, which the Company paid with a portion of proceeds of the Refinanced Mortgage discussed earlier in this footnote.
The Company can prepay all, or a portion, of the outstanding principal and unpaid interest of the $8.8M Note, however if any prepayment
is made prior to December 25, 2021, the Company shall be required to pay a prepayment premium equal to 10% of the principal amount
being prepaid. The Noteholder has the right to require the redemption of up to $250,000 of principal and unpaid interest thereon
per calendar month (the “Discretionary Monthly Redemptions”), which shall be paid in common stock if certain defined
conditions of the $8.8M Note and of the Company’s common stock are met, or else in cash. As of December 31, 2020, the Company
paid Discretionary Monthly Redemptions of $600,000 in the aggregate, and accrued interest through such date of approximately $405,000,
all in cash. Accordingly, the carrying value of the $8.8M Note was approximately $4.2 million at December 31, 2020.
The
$8.8M Note is secured by a first priority security interest in the assets of certain of the Company’s subsidiaries and brands,
and a pledge of the Company’s ownership interest in certain of its subsidiaries. The Noteholder has the option to convert
the $8.8M Note, in whole or in part, into shares of the Company’s common stock at a conversion price of $0.30,
subject to certain conversion limitations. This non-detachable conversion feature of the $8.8M Note had no intrinsic value
on the agreement date, and therefore no beneficial conversion feature arose. The $8.8M Note imposes certain covenants on the
borrowers, all of which were complied with as of December 31, 2020.
In
April 2019, MariMed Hemp issued a secured promissory note in the principal amount of $1,000,000 (the “$1M Note”) to
an unaffiliated party. The proceeds of the $1M Note were used to finance a portion of the Seed Transactions as further discussed
in Note 20 – Related Party Transactions. The $1M Note is secured by the collateral assignment of certain receivables
from GenCanna and certain obligations of GenCanna to MariMed Hemp. The principal balance plus a payment of $180,000, initially
due in December 2019, was extended to March 2020 in accordance with the terms of the $1M Note, requiring an additional payment
of $30,000 (the “$30,000 Fee”). Prior to the extended due date, the parties agreed that the $1M Note would continue
on a month-to-month basis bearing interest at a rate of 15% per annum. In September 2020, the Company paid down $500,000 of principal
on the $1M Note. At December 31, 2020, the outstanding balance consisted of $500,000 of principal and approximately $467,000 of
unpaid accrued interest which included the $30,000 Fee.
In
March 2019, the Company raised $6.0 million through the issuance of a secured promissory note (the “$6M Note”) to
an unaffiliated party (the “Holding Party”) bearing interest at a rate of 13% per annum and a service fee of $900,000
(the “Service Fee”). The proceeds of the note were used to finance a portion of the Seed Transactions as further discussed
in Note 20 – Related Party Transactions. The $6M Note is secured by the collateral assignment of certain receivables
from and obligations of GenCanna to MariMed Hemp. The $6M Note’s initial maturity date of December 31, 2019 was extended
to April 2020 in accordance with its terms, with the Company paying a $300,000 extension fee in December 2019 which was charged
to interest expense.
The
Company and the Holding Party entered into a note extension agreement in April 2020 (the “Initial Extension Agreement”)
pursuant to which (i) the $6M Note’s due date was extended to September 2020, and the $6M Note was modified to include unpaid
accrued interest of $845,000 through the modification date and interest at a rate of 10% per annum (the “$6.8M Note”),
and (iii) a new convertible note in the amount of $900,000 (the “$900k Note”) was issued evidencing the Service Fee,
bearing interest at a rate of 12% per annum. The Company satisfied the $900k Note and accrued interest of $20,100 in full as of
the June 2020 maturity date by the payment in July 2020 of $460,050 in cash, representing one-half of the principal and accrued
interest, and the issuance in June 2020 of 2,525,596 shares of the Company’s common stock, representing the other half of
the principal and accrued interest.
In
September 2018, the Company raised $3.0 million from the issuance of a secured promissory note to the Holding Party, bearing interest
at a rate of 10% per annum (the “$3M Note”, and together with the $6M Note, the “Initial Notes”). The
maturity date of the $3M Note, initially in March 2020, was extended for an additional six months in accordance with its terms,
with the interest rate increasing to 12% per annum during the extension period. Pursuant to the Initial Extension Agreement, the
maturity date of the $3M Note was extended to December 2020. The Company may elect to prepay the $3M Note in whole or part without
premium or penalty provided the Holding Party is given proper notice and the Company is not in default of the note agreement.
In
consideration of the Initial Extension Agreement, the Company (i) paid the Holding Party a fee of $50,000, (ii) extended the security
interest in the Company’s properties in Maryland to secure each note held by the Holding Party, and (iii) granted the Holding
Party certain security interests in equity interests held by the Company. Each of the notes held by the Holding Party provides
for cross-default and imposes certain covenants on the Company, all of which were complied with as of December 31, 2020.
As
part of the $3M Note transaction, the Company issued three-year warrants to the Holding Party’s designees to purchase 750,000
shares of the Company’s common stock at an exercise price of $1.80 per share. The Company recorded a discount on the $3M
Note of approximately $1,511,000 from the allocation of note proceeds to the warrants based on the fair value of such warrants
on the issuance date. Approximately $882,000 of the warrant discount was amortized to interest expense during 2018, and the remaining
$629,000 was amortized during 2019. Accordingly, the carrying value of the Initial Notes was $9 million and unpaid accrued interest
was approximately $1.5 million at December 31, 2019.
In
October 2020, the Company and the Holding Party entered into a second note extension agreement (the “Second Extension Agreement”)
whereby the Company (i) paid $1 million of principal and all outstanding accrued interest of approximately $333,000 on the $6.8M
Note; (ii) issued an amended and restated senior secured promissory note in the principal amount of $5,845,000 (the “$5.8M
Note”) to replace the $6.8M Note; and (iii) amended and restated the $3M Note (the “New $3M Note”, and together
with the $5.8M Note, the “Amended Notes”).
The
Amended Notes bear interest at a rate of 12% per annum and mature in September 2022. If all principal and accrued interest on
either or both of the Amended Notes are not paid on or prior to their respective maturity dates, the Holding Party shall have
the right, exercisable in its sole discretion at any time from September 2022 through March 2023, to convert all or a portion
of the principal and interest owed into shares of the Company’s common stock at a conversion price equal to the average
closing price for the 20 consecutive trading days prior to the date of conversion. The $5.8M Note requires mandatory principal
payments of $400,000 in February 2021, and $500,000 per quarter during the period from May 2021 to August 2022 (such quarterly
payments amounting to $3.0 million in the aggregate). The $5.8M Note can be prepaid in whole or in part at any time without penalty.
The New $3M Note can be prepaid in whole or in part without penalty only after the $5.8M Note has been fully repaid.
In
consideration of the Second Extension Agreement, the Company (i) issued four-year warrants to the Holding Party’s designees
to purchase up to 5,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share; (ii) paid the
Holding Party a fee of $100,000; and (iii) extended the security interest in certain Company properties and the pledge of certain
equity interests to secure the Amended Notes. The Company recorded a discount on the Amended Notes of approximately $573,000 based
on the fair value of such warrants on the issuance date, of which approximately $75,000 was amortized as of the end of 2020, and
the remainder to be amortized over the life of the Amended Notes. Accordingly, the carrying value of the Amended Notes approximated
$8.3 million at December 31, 2020, of which $1.9 million was current.
In
addition to the above transactions, the Company (i) was carrying $1,380,000
of principal on
promissory notes at the start of the reporting period (the “Existing Notes”), and (ii) raised $2,100,000
and $2,760,000
during the year ended December 31,
2020 and 2019, respectively, from the issuance of promissory notes to accredited investors bearing interest at rates ranging from
6.5%
to 18%
per annum, and maturing
in 2021 (the “Third Party Notes”).
During 2019, $950,000
of the Existing Notes was retired
by the Company through the issuance of common stock at a conversion price equal to the market price of the Company’s
common stock on the conversion date of $0.43
per share. No
Existing Notes were retired in 2020. Of
the Third Party Notes, in 2020, $2,800,000
was repaid and $500,000
was retired through the issuance
of common stock at a conversion price equal to the market price of the Company’s common stock on the conversion date of
$0.32
per share; no
Third Party Notes were retired
in 2019. Accordingly, at December 31, 2020 and 2019, $430,000
of the Existing Notes were outstanding
in both years, and $1,560,000
and $2,760,000,
respectively, of the Third Party
Notes were outstanding.
In
March 2021 the Company paid down the $4.4M Notes, the $1M Note, the New $3M Note, the $5.8M Note, the Existing Notes, and a portion
of the Third Party Notes from the proceeds of the financing transaction further discussed in Note 22 – Subsequent Events.
Debt
Maturities
As
of December 31, 2020, the aggregate scheduled maturities of the Company’s total debt outstanding, inclusive of the promissory
notes and mortgages described within this Note 11 – Debt, and the convertible debentures described in the following
Note 12 – Debentures Payable, were:
SCHEDULE OF AGGREGATE MATURITIES OF DEBT OUTSTANDING
2021
|
|
$
|
11,546,190
|
|
2022
|
|
|
11,673,153
|
|
2023
|
|
|
549,894
|
|
2024
|
|
|
582,913
|
|
2025
|
|
|
623,190
|
|
Thereafter
|
|
|
12,497,217
|
|
Total
|
|
|
37,472,557
|
|
Less discounts
|
|
|
(767,550
|
)
|
|
|
$
|
36,705,007
|
|
NOTE 12 – DEBENTURES PAYABLE
In a series of transactions from the period October 2018 through February 2020, the Company sold an aggregate of $21.0 million of
convertible debentures (the “$21M Debentures”) to an accredited investor pursuant to an amended securities purchase
agreement (the “SPA”). The following table as of December 31, 2020 summarizes the purchase dates and selected terms
of each debenture transaction that comprises the $21M Debentures:
SCHEDULE OF DEBENTURE TRANSACTION
Issue
Date
|
|
Maturity
Date
|
|
Initial
Principal
|
|
|
Interest
Rate
|
|
|
Issue
Discount
|
|
|
Warrant
Discount
|
|
|
Beneficial
Conv.
Feature
|
|
|
Converted To Common
Stk.
|
|
|
Outstanding
Principal
|
|
10/17/18
|
|
10/16/20
|
|
$
|
5,000,000
|
|
|
|
6.0
|
%
|
|
|
1.0
|
%
|
|
$
|
457,966
|
|
|
$
|
1,554,389
|
|
|
$
|
5,000,000
|
|
|
$
|
-
|
|
11/07/18
|
|
11/06/20
|
|
|
5,000,000
|
|
|
|
6.0
|
%
|
|
|
1.0
|
%
|
|
|
599,867
|
|
|
|
4,015,515
|
|
|
|
5,000,000
|
|
|
|
-
|
|
05/08/19
|
|
05/07/21
|
|
|
5,000,000
|
|
|
|
6.0
|
%
|
|
|
1.0
|
%
|
|
|
783,701
|
|
|
|
2,537,235
|
|
|
|
5,000,000
|
|
|
|
-
|
|
06/28/19
|
|
06/27/21
|
|
|
2,500,000
|
|
|
|
0.0
|
%
|
|
|
7.0
|
%
|
|
|
145,022
|
|
|
|
847,745
|
|
|
|
2,200,000
|
|
|
|
300,000
|
|
08/20/19
|
|
08/19/21
|
|
|
2,500,000
|
|
|
|
0.0
|
%
|
|
|
7.0
|
%
|
|
|
219,333
|
|
|
|
850,489
|
|
|
|
2,500,000
|
|
|
|
-
|
|
02/21/20
|
|
02/20/21
|
|
|
1,000,000
|
|
|
|
6.5
|
%
|
|
|
6.5
|
%
|
|
|
28,021
|
|
|
|
379,183
|
|
|
|
-
|
|
|
|
1,000,000
|
|
The
holder of the $21M Debentures (the “Holder”) has the right at any time to convert all or a portion of the $21M Debentures,
along with accrued and unpaid interest, into the Company’s common stock at conversion prices equal to 80% of a calculated
average, as determined in accordance with the terms of the $21M Debentures, of the daily volume-weighted price during the ten
consecutive trading days preceding the date of conversion, subject to a cap in certain conversions. Notwithstanding this conversion
right, the Holder shall limit conversions in any given month to certain agreed-upon amounts based on the conversion price, and
the Holder shall also be limited from beneficially owning more than 4.99% of the Company’s outstanding common stock (potentially
further limiting the Holder’s conversion right).
The
Company has the right to redeem all or a portion of the $21M Debentures, along with accrued and unpaid interest, at a 10% premium,
provided that the Company first delivers advance written notice to the Holder of its intention to make a redemption, with the
Holder allowed to effect certain conversions of the $21M Debentures during such notice period.
Upon
a change in control transaction, as defined, the Holder may require the Company to redeem all or a portion of the $21M Debentures
at a price equal to 110% of the outstanding principal amount of the $21M Debentures, plus all accrued and unpaid interest thereon.
So long as the $21M Debentures are outstanding, in the event the Company enters into a Variable Rate Transaction (“VRT”),
as defined in the SPA, the Holder may cause the Company to revise the terms of the $21M Debentures to match the terms of the convertible
security issued in such VRT.
In
conjunction with the issuance of the $21M Debentures, the Company issued the Holder three-year warrants to purchase an aggregate
of 1,354,675 shares of the Company’s common stock at exercise prices ranging from $0.75 to $5.50 per share, of which warrants
to purchase 180,000 shares of common stock at an exercise price of $0.75 were issued in 2020. The fair value of the warrants of
approximately $2.2 million was recorded as a discount to the carrying amount of the $21M Debentures and are amortized to interest
expense over the respective term of the individual debentures comprising the $21M Debentures.
Based
on the conversion prices of the $21M Debentures in relation to the market value of the Company’s common stock, the $21M
Debentures provided the Holder with a beneficial conversion feature, as the embedded conversion option was in-the-money on the
commitment date. The aggregate intrinsic value of the beneficial conversion feature of approximately $10.2 million was recorded
as a discount to the carrying amount of the $21M Debentures, with an offset to additional paid-in-capital. The beneficial conversion
feature is amortized to interest expense over the respective term of the individual debentures comprising the $21M Debentures.
Pursuant
to the terms of a registration rights agreement with the Holder, entered into concurrently with the SPA, the Company agreed to
provide the Holder with certain registration rights with respect to any potential shares issued pursuant to the terms of the SPA
and the $21M Debentures. An addendum to the SPA stipulates that the Holder has agreed not to undertake a conversion of all or
a portion of the $21M Debentures that would require the Company to issue more shares than the amount of available authorized shares
at the time of conversion, which amount of authorized shares shall not be less than the current authorized number of 500 million
shares of common stock, thereby eliminating the requirement to bifurcate and account for the conversion feature of the $21M Debentures
as a derivative.
The
Holder converted, in several transactions from November 2018 through December 2020, an aggregate of $19.7 million of principal
and approximately $777,000 of accrued interest into 88,093,390 shares of common stock at conversion prices ranging from $0.11
to $3.06 per share. Of these conversions, (i) during 2020 an aggregate of $9.7 million of principal and approximately $365,000
of accrued interest was converted into 77,766,559 shares of common stock at exercise prices ranging from $0.11 and $0.34 per share,
and (ii) during 2019, an aggregate of $8.6 million of principal and approximately $376,000 of accrued interest was converted into
6,798,339 shares of common stock and subscriptions on 3,004,131 shares of common stock at exercise prices ranging from $0.37 and
$3.06 per share during 2019.
All
of the aforementioned conversions were effected in accordance with the terms of the respective convertible debenture agreement,
and therefore the Company was not required to record a gain or loss on such conversions.
During
the year ended December 31, 2020 and 2019, amortization of the beneficial conversion features, after adjustment for the aforementioned
conversions, approximated $3.2 million and $5.2 million, respectively; amortization of the warrant discounts approximated $805,000
and $1.3 million respectively; and the amortization of original issue discounts approximated $321,000 and $184,000, respectively.
Additionally, accrued interest expense for such periods approximated $224,000 and $513,000, respectively.
At
December 31, 2020, the aggregate outstanding principal balance of the $21M Debentures was $1.3 million. Also on such date, the
unamortized balances of the beneficial conversion features, the warrant discounts, and original issue discounts were approximately
$177,000, $39,000, and $52,000, respectively. Accordingly, at December 31, 2020, the carrying value of the $21M Debentures approximated
$1.0 million, all of which was current.
At
December 31, 2019, the aggregate outstanding principal balance on the $21M Debentures was $10.0 million. Also on such date, the
unamortized balances of the beneficial conversion features, the warrant discounts, and original issue discounts were approximately
$3.0 million, $817,000, and $307,000, respectively. Accordingly, at December 31, 2019, the carrying value of the $21M Debentures
approximated $5.8 million, all of which was long term.
NOTE
13 – MEZZANINE EQUITY
In
February 2020, the Company entered into an exchange agreement with two institutional shareholders (the “TIS Exchange Agreement”)
whereby the Company (i) exchanged 4,908,333 shares of the Company’s common stock previously acquired by the two institutional
shareholders for an equal number of shares of newly designated Series B convertible preferred stock, and (ii) issued the $4.4M
Notes previously discussed in Note 11 – Debt.
In
connection with the TIS Exchange Agreement, the Company filed (i) a certificate of designation with respect to the rights and
preferences of the Series B convertible preferred stock, and (ii) a certificate of elimination to return all shares of the Series
A convertible preferred stock, of which no shares were issued or outstanding at the time of filing, to the status of authorized
and unissued shares of undesignated preferred stock.
The
holders of Series B convertible preferred stock (the “Series B Holders”) are entitled to cast the number of votes
equal to the number of shares of common stock into which the shares of Series B convertible preferred stock are convertible, together
with the holders of common stock as a single class, on most matters. However, the affirmative vote or consent of the Series B
Holders voting separately as a class is required for certain acts taken by the Company, including the amendment or repeal of certain
charter provisions, liquidation or winding up of the Company, creation of stock senior to the Series B convertible preferred stock,
and/or other acts defined in the certificate of designation.
The
Series B convertible preferred stock shall, with respect to dividend rights and rights on liquidation, winding up and dissolution,
rank senior to the Company’s common stock. The Company shall not declare, pay, or set aside any dividends on shares of any
other class or series of capital stock of the Company unless the Series B Holders then outstanding shall first receive, or simultaneously
receive, a dividend on each outstanding share of Series B convertible preferred stock in an amount calculated pursuant to the
certificate of designation.
In
the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the Series B Holders then outstanding
shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any payment
shall be made to the holders of common stock by reason of their ownership thereof, an amount per share equal to $3.00, plus any
dividends declared but unpaid thereon, with any remaining assets distributed pro-rata among the holders of the shares of Series
B convertible preferred stock and common stock, based on the number of shares held by each such holder, treating for this purpose
all such securities as if they had been converted to common stock.
At
any time on or prior to the six-year anniversary of the issuance date of the Series B convertible preferred stock, (i) the Series
B Holders have the option to convert their shares of Series B convertible preferred stock into common stock at a conversion price
of $3.00 per share, without the payment of additional consideration, and (ii) the Company has the option to convert all, but not
less than all, shares of Series B convertible preferred stock into common stock at a conversion price of $3.00 if the daily volume
weighted average price of common stock (the “VWAP”) exceeds $4.00 per share for at least twenty consecutive trading
days prior to the date on which the Company gives notice of such conversion to the Series B Holders.
On
the day following the six-year anniversary of the issuance of the Series B convertible preferred stock, all outstanding shares
of Series B convertible preferred stock shall automatically convert into common stock as follows:
If
the sixty-day VWAP is less than or equal to $0.50 per share, the Company shall have the option to (i) convert all shares of Series
B convertible preferred stock into common stock at a conversion price of $1.00 per share, and pay cash to the Series B Holders
equal to the difference between the 60-day VWAP and $3.00 per share, or (ii) pay cash to the Series B Holders equal to $3.00 per
share.
If
the sixty-day VWAP is greater than $0.50 per share, the Company shall have the option to (i) convert all shares of Series B convertible
preferred stock into common stock at a conversion price per share equal to the quotient of $3.00 per share divided by the sixty-day
VWAP, or (ii) pay cash to the Series B Holders equal to $3.00 per share, or (iii) convert all shares of Series B convertible preferred
stock into common stock at a conversion price per share equal to the sixty-day VWAP per share and pay cash to the Series B Holders
at the difference between $3.00 per share and the sixty-day VWAP per share.
The
Company shall at all times when the Series B convertible preferred stock is outstanding, reserve and keep available out of its
authorized but unissued capital stock, for the purpose of effecting the conversion of the Series B convertible preferred stock,
such number of its duly authorized shares of common stock as shall from time to time be sufficient to effect the conversion of
all outstanding Series B convertible preferred stock.
NOTE
14 – STOCKHOLDERS’ EQUITY
Preferred
Stock
In
February 2020, the Company filed a certificate of elimination to return all shares of the Series A convertible preferred stock
to the status of authorized and unissued shares of undesignated preferred stock. Concurrent with this filing, the Company also
filed a certificate of designation to designate the rights and preferences of newly authorized Series B convertible preferred
stock, shares of which were issued in February 2020 as discussed in Note 13 – Mezzanine Equity.
In
March 2021, upon the closing of the financing transaction discussed in Note 22 – Subsequent Events, the Company filed
a certificate of designation with respect to the rights and preferences of newly-issued Series C convertible preferred stock.
Such stock is zero coupon, non-voting, and has a liquidation preference equal to its investment amount plus declared but unpaid
dividends. Holders of Series C convertible preferred stock are entitled to receive dividends on an as-converted basis.
Common
Stock
In
February 2020, pursuant to the TIS Exchange Agreement, the 4,908,333 shares of common stock exchanged for shares of Series B convertible
preferred stock were treated as an increase to treasury stock of $14,725,000 ($3.00 per share), and then immediately cancelled,
thereby reducing treasury stock to zero, with corresponding reductions to common stock of approximately $5,000 (the par value
of the exchanged common shares) and additional paid-in capital of approximately $14,720,000.
In
2019, the Company sold 1,014,995 shares of common stock at prices of $0.70 and $3.25 per share, resulting in total proceeds of
$2,750,000. No common stock was sold in 2020.
In
2020 and 2019, the Company issued 4,400,000 and 172,663 shares of common stock, respectively, to settle obligations of approximately
$699,000 and $121,000, respectively. Based on the price of the Company’s common stock on the dates of issuance, the Company
incurred non-cash losses on these settlements of approximately $45,000 in 2020 and $5,000 in 2019 which were reflected under Loss
On Debt Settlements on the statement of operations.
In
2020, the Company granted 109,210
shares of common stock to a current employee.
The fair value of the shares of approximately $21,000
was charged to employee compensation during
the period. Of these granted shares, 11,413
were yet to be issued at December 31,
2020 and were reflected in Common Stock Subscribed But Not Issued on the balance sheet. In 2019, the Company granted
141,546
shares of common stock to employees. The
fair value of these shares of approximately $223,000
was charged to employee compensation during
the period. Of these granted shares, 32,726
were yet to be issued at December 31,
2019 and were included in Common Stock Subscribed But Not Issued on the balance sheet.
In
2020 and 2019, the Company issued 3,236,857 and 97,136 shares of common stock, respectively, associated with previously issued
subscriptions on common stock with a value of approximately $1,168,000 and $169,000, respectively.
In
2020, (i) 90,000
shares of common stock granted to employees,
and (ii) 1,297,447
shares of common stock issued from
the exercise of stock options by a related party, were forfeited by the holders of such common stock. The Company recorded these
returned shares at par value. No
common stock forfeitures occurred in 2019.
As
previously disclosed in Note 3 – Acquisitions, the Company issued in 2019 (i) 1,000,000 shares of common stock in
connection with the acquisition of the KPGs and Mari-IL, (ii) 1,000,000 shares of common stock as a good faith deposit on the
Harvest acquisition, and (iii) 520,000 shares of common stock in connection with the acquisition of MediTaurus.
As
previously disclosed in Note 4 – Investments, the Company issued 500,000 shares of common stock in 2019 to purchase
a minority interest in Terrace.
As
previously disclosed in Note 11 – Debt, in 2020 and 2019, the Company issued 6,165,355 and 2,435,116 shares of common
stock, respectively, to retire approximately $1.4 million and $1,0 million of promissory notes (principal and accrued interest).
As
previously disclosed in Note 12 – Debentures Payable, the holder of the $21M Debentures converted (i) in 2020, approximately
$10.1 million of principal and interest into 77,766,559 and shares of common stock, and (ii) in 2019, approximately $9.0 million
of principal and interest into 6,798,339 shares of common stock and subscriptions on 3,004,131 shares of common stock.
As
further disclosed in Note 15 – Stock Options, in 2020 and 2019, 550,000 and 3,261,808 shares of common stock, respectively,
were issued in connection with the exercise of stock options.
As
further disclosed in Note 16 – Warrants, warrants to purchase 686,104 shares of common stock were exercised in 2019.
No warrants were exercised in 2020.
Common
Stock Issuance Obligations
At
December 31, 2020, the Company was obligated to issue 11,413 shares of common stock, valued at approximately $5,000, in connection
with a stock grant to a current employee. These shares were issued in February 2021.
At
December 31, 2019, the Company was obligated to issue (i) 32,726 shares of common stock, valued at approximately $29,000, in connection
with the stock grants disclosed earlier in this Note 14 – Stockholders’ Equity, (ii) 3,004,131 shares of common
stock, valued at approximately $1,117,000, with respect to the December 2019 conversion of a portion of the $21M Debentures as
previously disclosed in Note 12 – Debentures Payable, and (iii) 200,000 shares of common stock associated with exercise
of stock options by the Company’s CEO as further disclosed in Note 20 – Related Party Transactions. These shares
were issued in the first quarter of 2020.
Amended
and Restated 2018 Stock Award and Incentive Plan
In
August 2019, the Company’s board of directors approved the Amended and Restated 2018 Stock Award and Incentive Plan (the
“Incentive Plan”), based on the board’s belief that awards authorized under the Incentive Plan provide incentives
for the achievement of important performance objectives and promote the long-term success of the Company. In September 2019, the
Incentive Plan was approved by the stockholders at the Company’s annual stock-holders meeting.
The
Incentive Plan is an omnibus plan, authorizing a variety of equity award types as well as cash and long-term incentive awards.
The Incentive Plan amends and restates the Company’s 2018 Stock Award and Incentive Plan (the “Previous Plan”),
which was approved by the board of directors in July 2018 but never presented to stockholders for approval. Any grants made under
the Previous Plan prior to the approval date of the Incentive Plan shall continue to be governed by the terms of the Previous
Plan.
The
Incentive Plan authorizes a broad range of awards, including stock options, stock appreciation rights, restricted stock, deferred
stock, dividend equivalents, performance shares, cash-based performance awards, and other stock-based awards. Such awards can
be granted to employees, non-employee directors and other persons who provide substantial services to the Company and its affiliates.
Nothing in the Incentive Plan precludes the payment of other compensation to officers and employees, including bonuses based upon
performance, outside of the Incentive Plan.
An
aggregate of 40,000,000 shares are reserved for delivery to participants, and may be used for any type of award under the Incentive
Plan. Shares actually delivered in connection with an award will be counted against such number of reserved shares. Shares will
remain available for new awards if an award under the Incentive Plan expires, is forfeited, canceled, or otherwise terminated
without delivery of shares or is settled in cash. Each award under the Incentive Plan is subject to the Company’s claw back
policy in effect at the time of grant of the award.
The
board of directors may amend, suspend, discontinue, or terminate the Incentive Plan or the authority to grant awards thereunder
without stockholder approval, except as required by law or regulation or under rules of the stock exchange, if any, on which the
Company’s stock may then be listed. Unless earlier terminated, grants under the Incentive Plan will terminate ten years
after stockholder approval of the Incentive Plan, and the Incentive Plan will terminate when no shares remain available and the
Company has no further obligation with respect to any outstanding award.
NOTE
15 – STOCK OPTIONS
In
2020, the Company granted five-year
options to purchase up to 4,494,500
shares of common stock at exercise prices
ranging from $0.14
and $0.30
per share. The fair values of these options
of approximately $501,000
in the aggregate are being amortized to
compensation expense over their vesting periods, of which approximately $282,000
was amortized in 2020. Additionally,
compensation expense in 2020 for options issued in previous years, and continuing to be amortized over their respective vesting
periods, approximated $801,000.
In
2019, the Company granted options to purchase up to 2,565,000
shares of common stock, expiring four
and five years from their grant dates, at exercise prices ranging from $0.42
to $1.95
per share. The fair values of these options
of approximately $1,502,000
in the aggregate are being amortized to
compensation expense over their vesting periods, of which approximately $544,000
was amortized in 2019. Additionally,
compensation expense in 2019 for options issued in previous years, and continuing to
be amortized over their respective
vesting periods, approximated $144,000.
In
2020, options to purchase 550,000 shares of common stock were exercised at prices of $0.13 to $0.14 per share. In 2019, options
to purchase 3,667,499 shares of common stock were exercised at prices ranging from $0.08 to $0.77 per share. Of these exercised
options, 2,167,499 were exercised on a cashless basis with the exercise prices paid via the surrender of 405,691 shares of common
stock.
In
2020 and 2019, options to purchase 200,000
and 936,251
shares of common stock, respectively,
were forfeited or expired, resulting in an aggregate reduction of amortized compensation expense of approximately $113,000
and $527,000,
respectively.
Stock
options outstanding and exercisable as of December 31, 2020 were:
SCHEDULE OF STOCK OPTIONS OUTSTANDING AND EXERCISABLE
|
|
|
Shares Under Option
|
|
|
|
|
Exercise Price
per Share
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Remaining Life
in Years
|
|
|
$0.140
|
|
|
|
160,000
|
|
|
|
-
|
|
|
|
4.52
|
|
|
$0.149
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
5.00
|
|
|
$0.169
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
4.87
|
|
|
$0.210
|
|
|
|
70,000
|
|
|
|
-
|
|
|
|
4.90
|
|
|
$0.225
|
|
|
|
2,000,000
|
|
|
|
687,500
|
|
|
|
4.86
|
|
|
$0.250
|
|
|
|
20,000
|
|
|
|
10,000
|
|
|
|
4.41
|
|
|
$0.250
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
4.82
|
|
|
$0.250
|
|
|
|
800,000
|
|
|
|
-
|
|
|
|
4.87
|
|
|
$0.250
|
|
|
|
80,000
|
|
|
|
20,000
|
|
|
|
4.90
|
|
|
$0.250
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
4.17
|
|
|
$0.300
|
|
|
|
554,500
|
|
|
|
277,250
|
|
|
|
4.25
|
|
|
$0.330
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
0.19
|
|
|
$0.417
|
|
|
|
900,000
|
|
|
|
875,000
|
|
|
|
3.98
|
|
|
$0.450
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
0.75
|
|
|
$0.590
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
3.93
|
|
|
$0.630
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
1.00
|
|
|
$0.770
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
2.00
|
|
|
$0.900
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.36
|
|
|
$0.910
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
1.81
|
|
|
$0.950
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
2.00
|
|
|
$0.992
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
3.74
|
|
|
$1.000
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
3.84
|
|
|
$1.350
|
|
|
|
100,000
|
|
|
|
50,000
|
|
|
|
2.58
|
|
|
$1.950
|
|
|
|
375,000
|
|
|
|
375,000
|
|
|
|
2.50
|
|
|
$2.320
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
2.69
|
|
|
$2.450
|
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
1.98
|
|
|
$2.500
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
2.65
|
|
|
$2.650
|
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
2.73
|
|
|
$2.850
|
|
|
|
56,250
|
|
|
|
56,250
|
|
|
|
1.95
|
|
|
$2.850
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
2.95
|
|
|
$3.000
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
2.96
|
|
|
$3.725
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
2.94
|
|
|
|
|
|
|
9,805,750
|
|
|
|
6,991,000
|
|
|
|
|
|
NOTE
16 – WARRANTS
During
2020, in conjunction with the $21M Debentures previously disclosed in Note 12 – Debentures Payable, the Company issued
three-year warrants to purchase up to 180,000 shares of common stock at an exercise price of $0.75 per share. The fair value of
these warrants on the issuance date approximated $1,148,000, of which approximately $24,000 was amortized to interest expense
in 2020 and the remainder to be amortized over the term of the respective debenture.
Also
during 2020, as previously disclosed in Note 11 – Debt, (i) as part of the $8.8M Note transaction, the Company issued
three-year warrants to purchase up to 750,000 shares of common stock at an exercise price of $0.50 per share, and (ii) in consideration
of the Second Extension Agreement, the Company issued four-year warrants to purchase up to 5,000,000 shares of the Company’s
common stock at an exercise price of $0.25 per share. The fair value of these warrants on their issuance dates approximated $639,000,
with approximately $90,000 of this amount amortized to interest expense in 2020 and the remainder to be amortized by the maturity
dates of the respective promissory notes.
During
2019, also in conjunction with the $21M Debentures, the Company issued three-year warrants to purchase up to 850,000 shares of
common stock at exercise prices of $3.00 and $5.00 per share. The fair value of these warrants on the issuance dates approximated
$1,148,000, of which approximately $576,000 and $331,000 was amortized to interest expense in 2020 and 2019, respectively, and
the remainder to be amortized over the term of the respective debentures.
Also
during 2019, as part of the $10M Note transaction previously disclosed in Note 11 – Debt, the Company issued three-year
warrants to purchase up to 375,000 shares of common stock at an exercise price of $4.50 per share. The fair value of these warrants
at issuance approximated $601,000, with approximately $523,000 of this amount amortized to interest expense during 2019, and the
balance amortized in 2020. Also during 2019, the Company issued four-year warrants to purchase up to 10,000 shares of common stock
in conjunction with the issuance of $100,000 of the Third Party Notes discussed in Note 11 – Debt. These warrants
are exercisable at a price of $0.75 per share. The fair value of these warrants at issuance of approximately $5,000 was amortized
to interest expense during 2019.
The
Company also issued, in 2020 and 2019, stand-alone warrants, expiring three years from issuance, to purchase up to 25,000 and
625,000 shares of common stock, respectively. at an exercise price of $0.50 in 2020, and exercise prices ranging from $0.80 to
$1.71 per share in 2019. The aggregate fair values of these warrants of approximately $2,000 in 2020 and $392,000 in 2019 were
charged to compensation expense in the year of issuance.
In
November 2020, in accordance with the terms of the warrant agreement, the Company adjusted the exercise price from $1.80 per share
to $0.11 per share of warrants to purchase up to 750,000 share of common stock previously issued in September 2018 as part of
the $3M Note discussed in Note 11 – Debt. No other change was made to terms of these warrants. The Company recorded
a charge of approximately $69,000 in 2020 representing the fair value of these warrants on the adjustment date. No other warrant
adjustments were made by the Company.
During
2019, warrants to purchase 686,104 shares of common stock were exercised at exercise prices ranging from $0.12 to $1.75 per share,
resulting in aggregate proceeds to the Company of approximately $612,000. No warrants were exercised during 2020.
During
2020, warrants to purchase 817,939 shares of common stock with exercise prices ranging from $0.40 to $2.25 per share were forfeited.
No warrants were forfeited in 2019.
At
December 31, 2020 and 2019, warrants to purchase up to 16,917,168 and 11,780,107 shares of common stock, respectively, were outstanding
at exercise prices ranging from $0.15 to $5.50 per share in both years.
NOTE
17 – REVENUES
For
the years ended December 31, 2020 and 2019, the Company’s revenues were comprised of the following major categories:
SCHEDULE OF REVENUES COMPRISED OF MAJOR CATEGORIES
|
|
2020
|
|
|
2019
|
|
Product sales
|
|
$
|
39,400,726
|
|
|
$
|
1,542,037
|
|
Product sales from related party
|
|
|
-
|
|
|
|
29,029,249
|
|
Real estate
|
|
|
6,776,697
|
|
|
|
6,836,316
|
|
Management
|
|
|
1,481,897
|
|
|
|
2,798,738
|
|
Supply procurement
|
|
|
1,549,856
|
|
|
|
3,555,555
|
|
Licensing
|
|
|
1,684,792
|
|
|
|
1,794,161
|
|
Other
|
|
|
1,183
|
|
|
|
48,588
|
|
Total revenues
|
|
$
|
50,895,151
|
|
|
$
|
45,604,644
|
|
The
amount under Product Sales From Related Party shown in the table above represents the one-time revenues from the seed transactions
with GenCanna, which is further disclosed in Note 20 – Related Party Transactions. Excluding these revenues, in 2020
and 2019, revenue from two clients represented 20% and 78%, respectively, of total revenues.
NOTE
18 – BAD DEBTS
The
Company maintains two types of reserves to deal with uncertain collections of amounts due—an allowance against trade accounts
receivable, and a reserve against cash advanced by the Company to
its cannabis-licensed clients for working capital purposes (such advances, net of any collections,
are referred to as working capital balances).
During
2019, the Company (i) increased the allowance against trade accounts receivable (the “AR
Allowance”) by approximately $39.5 million, (ii) increased the reserve against
working capital balances (the “WC Reserve”) by approximately $3.4 million, and (iii) wrote off approximately
$1.6 million of notes receivable. The aggregate of these three amounts of approximately $44.5 million was charged to Bad Debts
on the statement of operations for the year ended December 31, 2019.
The
2019 increase in the AR Allowance was comprised of a general allowance of $600,000 against receivable balances as they age, and
specific allowances against the receivable balances due from (i) GenCanna of approximately $29.0 million following GenCanna’s
Chapter 11 filing as discussed in Note 20 – Related Party Transactions, (ii) Kind of approximately $9.7 million,
in light of the current litigation between the Company and Kind as further discussed in Note 21 – Commitments and Contingencies,
and (iii) Harvest of approximately $239,000 based on the expected impact of the COVID-19 pandemic on Harvest’s local economy.
The
2019 increase in the WC Reserve was comprised of specific reserves against the working capital balances of Kind of approximately
$1.5 million and Harvest of approximately $1.9 million.
During
2020, the Company increased the AR Allowance by approximately $500,000,
and the WC Reserve by approximately $482,000.
The aggregate of these two amounts of approximately $982,000
was charged to Bad Debts on the
statement of operations for the year ended December 31, 2020.
The
2020 increase in the AR Allowance was comprised of increases to the specific allowances against the Kind and Harvest receivable
balances of approximately $790,000 and $76,000, respectively, offset by a reduction to the general allowance of approximately
$366,000. The 2020 increase in the WC Reserve was comprised of an increase to the reserves against the working capital balances
of Harvest of approximately $482,000.
NOTE
19 – INCOME TAXES
At December 31, 2020 and 2019,
the Company’s cumulative net operating losses were approximately $10.6
million and $26.3
million, respectively. At December 31, 2020 and 2019, the Company recorded a provision for state taxes of approximately $2.1
million and approximately $67,000, respectively. No
federal provision was required at December 31, 2020 and 2019.
The
reconciliations between the Company’s effective tax rates and the statutory tax rate for the years ended December 31, 2020
and 2019 were as follows:
SCHEDULE OF RECONCILIATION OF INCOME TAXES
|
|
2020
|
|
|
2019
|
|
U.S federal taxes at the statutory rate
|
|
|
21.0%
|
|
|
|
21.0%
|
|
State taxes net of federal benefit
|
|
|
7.5%
|
|
|
|
6.3%
|
|
Valuation allowance
|
|
|
(28.5)%
|
|
|
|
(27.3)%
|
|
Total
|
|
|
0.0%
|
|
|
|
0.0%
|
|
The
approximate income tax effect of the Company’s loss carryforwards and temporary differences at December 31,
2020 and 2019 were as follows:
SCHEDULE OF DEFERRED TAX ASSET
|
|
2020
|
|
|
2019
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,613,003
|
|
|
$
|
14,139,629
|
|
Allowance for doubtful accounts
|
|
|
28,601,392
|
|
|
|
28,854,999
|
|
Stock compensation
|
|
|
6,920,551
|
|
|
|
6,330,555
|
|
Loss on equity investments
|
|
|
21,649,421
|
|
|
|
22,375,404
|
|
Goodwill writeoffs
|
|
|
2,856,035
|
|
|
|
2,903,968
|
|
Change in fair value of investments
|
|
|
708,203
|
|
|
|
465,895
|
|
Lease payments
|
|
|
381,174
|
|
|
|
307,909
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
-
|
|
Depreciation
|
|
|
(8,375,569
|
)
|
|
|
(3,941,315
|
)
|
Real
estate revenue
|
|
|
(2,502,727
|
)
|
|
|
(2,550,586
|
)
|
Net deferred tax asset
|
|
|
57,851,483
|
|
|
|
68,886,458
|
|
Valuation allowance
|
|
|
(57,851,483
|
)
|
|
|
(68,886,458
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Federal net operating losses carryforward
indefinitely, subject to an annual limitation of 80% of taxable income, while state net operating losses expire at various dates
beginning in 2031. These tax attributes are subject to an annual limitation from equity shifts, which constitute a change of
ownership as defined under IRC Section 382. The Company recorded a valuation allowance against its net deferred tax assets at
December 31, 2020 and 2019 due to the uncertainty regarding the realization of such assets. The Company’s assessment of the
realization of its deferred tax assets of future periods may differ in light of changing circumstances.
For the years ended December 31, 2020 and
2019, the Company’s wholly-owned subsidiaries in Illinois and Massachusetts that cultivated and manufactured cannabis and
cannabis-infused products were subject to the limitations of Section 280E of the Internal Revenue Code (“Section 280E”).
Section 280E denies all deductions from gross income in computing taxable income of these subsidiaries, but allows for cost of
goods sold to be taken into account in the calculation of gross income. As the Company files consolidated income tax returns,
the taxable income generated from these subsidiaries subject to Section 280E was offset by loss carryforwards generated by the
Company’s subsidiaries not subject to Section 280E.
The
Company previously adopted the provision for uncertain tax positions under ASC 740. The adoption did not have an impact on the
Company’s retained earnings balance. At December 31, 2020 and 2019, the Company had no
recorded liabilities for uncertain tax
positions and had no
accrued interest or penalties related
to uncertain tax positions.
The
Company files income tax returns in the U.S. federal tax jurisdiction and various state jurisdictions. The Company is currently
open to examination under the statute of limitations by the Internal Revenue Service and state jurisdictions for the tax years
ended 2017 through 2020.
NOTE
20 – RELATED PARTY TRANSACTIONS
Concurrent
with the conversion of the subordinated secured convertible debentures of GenCanna disclosed in Note 4 – Investments,
the Company’s CEO was appointed to GenCanna’s board of directors.
In
2019, the Company, through its MariMed Hemp subsidiary, entered into several hemp seed sale transactions with GenCanna whereby
the Company acquired $20.75 million of hemp seed inventory which it sold and delivered to GenCanna for $33.2 million. The Company
provided GenCanna with extended payment terms through December 2019, to coincide with the completion of the seeds’ harvest,
although the payment by GenCanna was not contingent upon the success of such harvest or its yield. To partially fund the seed
purchases, the Company raised $17.0 million in debt financings which is included in Notes Payable on the balance sheet
and previously discussed in Note 11 – Debt.
By
the end of 2019, GenCanna had not paid the amount it owed the Company for its seed purchases and in February 2020, as previously
discussed in Note 4 – Investments, under pressure from certain of its creditors, the GenCanna Debtors agreed to convert
a previously-filed involuntary bankruptcy proceeding into a voluntary Chapter 11 proceeding, and filed voluntary petitions under
Chapter 11 in the Bankruptcy Court.
As
required by the relevant accounting guidance, the Company initially recorded the $33.2 million due from GenCanna as a related
party receivable, with approximately $29.0 million recognized as related party revenue, and approximately $4.2 million classified
as unearned revenue (such amount representing the Company’s 33.5% ownership portion of the profit on these transactions,
which was to have been recognized as revenue upon payment by GenCanna). As a result of GenCanna’s Chapter 11 proceedings,
the Company fully reserved the receivable balance of approximately $29.0 million and wrote off the entire unearned revenue balance
of approximately $4.2 million. Please refer to Note 21 – Commitments and Contingencies for additional discussion
of GenCanna’s bankruptcy proceedings.
In
2019, the Company granted five-year options to purchase 100,000 shares of common stock to each of the Company’s three independent
board members at an exercise price of $0.99. The aggregate fair value of these options approximated $191,000, of which approximately
$189,000 was amortized in 2019 and the remainder in 2020. No options were granted to related parties during 2020.
In
2020, options to purchase an aggregate of 550,000 shares of common stock were exercised by the Company’s CEO, CFO, and an
independent board member at exercise prices of $0.13 and $0.14 per share. In 2019, options to purchase an aggregate of 332,499
shares of common stock were exercised by the Company’s CEO and an independent board member at exercise prices of $0.08 and
$0.14 per share. The independent board member’s 132,499 options were exercised on a cashless basis with the exercise prices
paid via the surrender of 3,108 shares of common stock. At December 31, 2019, the shares of common stock associated with the exercise
by the Company’s CEO were not issued and included in Common Stock Subscribed But Not Issued on the balance sheet.
In
2019, options to purchase 117,501 shares of common stock were forfeited by board members. No options were forfeited by related
parties in 2020.
The
Company’s current corporate offices are leased from a company owned by the CFO under a 10-year lease that commenced August
2018 and contains a five-year extension option. In 2020 and 2019, expenses incurred under this lease approximated $156,000 in
both years.
In
2020 and 2019, the Company procured nutrients, lab equipment, cultivation supplies, a vehicle, small tools, and furniture from
an entity owned by the Company’s COO and President. The aggregate purchases in 2020 and 2019 approximated $2.5 million and
$3.2 million, respectively.
In
2020 and 2019, the Company paid royalties on the revenue generated from its Betty’s Eddies® product line to an entity
owned by the Company’s COO and President. The aggregate royalties owed in 2020 and 2019 approximated $615,000 and $600,000,
respectively.
In
2020, the Company purchased fixed assets and consulting services of approximately $938,000 in the aggregate from two entities
owned by two of the Company’s general managers. The Company did not make any purchases from these two entities in 2019.
In
2020 and 2019, the Company paid management fees to an entity owned by the Company’s CEO and CFO. The aggregate paid in 2020
and 2019 approximated $41,000 and $145,000, respectively.
In
2020 and 2019, one of the Company’s majority owned subsidiaries paid distributions to the Company’s CEO and CFO,
who own minority equity interests in such subsidiary. The aggregate distributed in 2020 and 2019 approximated $30,000
and $52,000,
respectively.
The
balance of Due To Related Parties at December 31, 2020 and 2019 of approximately $1.2 million and $1.5 million, respectively,
were comprised of amounts owed of approximately (i) $460,000 and $420,000, respectively, to the Company’s CEO and CFO, (ii)
$653,000 and $990,000, respectively, to companies owned by these officers, and (iii) $45,000 in both periods to a stockholder
of the Company. Such amounts owed are not subject to repayment schedules.
The
Company’s mortgages with Bank of New England and a portion of the Third Party Notes, as discussed in Note 11 –
Debt, are personally guaranteed by the Company’s CEO and CFO.
NOTE
21 – COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company is the lessee under five operating leases and four finance leases. These leases contain rent holidays and customary escalations
of lease payments for the type of facilities being leased. The Company recognizes rent expense on a straight-line basis over the
expected lease term, including cancelable option periods which the Company fully expects to exercise. Certain leases require the
payment of property taxes, insurance and/or maintenance costs in addition to the rent payments.
The
details of the Company’s operating lease agreements are as follows:
|
●
|
Delaware
– 4,000 square feet of retail space in a multi-use building under a five-year lease that commenced in October 2016 and
contains a five-year option to extend the term. The Company developed the space into a cannabis dispensary which is subleased
to its cannabis-licensed client.
|
|
|
|
|
●
|
Delaware
– a 100,000 square foot warehouse leased in March 2019 that the Company is developing into a cultivation and processing
facility to be subleased to the same Delaware client. The lease term is 10 years, with an option to extend the term for three
additional five-year periods.
|
|
|
|
|
●
|
Nevada
– 10,000 square feet of an industrial building that the Company has built-out into a cannabis cultivation facility and
plans to rent to its cannabis-licensed client under a sub-lease which will be coterminous with this lease expiring in 2024.
|
|
|
|
|
●
|
Massachusetts
– 10,000 square feet of office space which the Company utilizes as its corporate offices under a 10-year lease with
a related party expiring in 2028, with an option to extend the term for an additional five-year period.
|
|
|
|
|
●
|
Maryland
– a 2,700 square foot 2-unit apartment under a lease that expires in July 2020 with an option to renew for a two-year
term.
|
The
Company leases machinery and office equipment under finance leases that expire in February 2022 through June 2024 with such terms
being a major part of the economic useful life of the leased property.
The
components of lease expense for the year ended December 31, 2020 were as follows:
SCHEDULE OF COMPONENTS OF LEASE EXPENSE
Operating lease cost
|
|
$
|
983,601
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
32,683
|
|
Interest on lease liabilities
|
|
|
7,488
|
|
Total finance lease cost
|
|
$
|
40,171
|
|
The
weighted average remaining lease term for operating leases is 8.5 years, and for the finance lease is 2.8 years. The weighted
average discount rate used to determine the right-of-use assets and lease liabilities was 7.5% for all leases.
Future
minimum lease payments as of December 31, 2020 under all non-cancelable leases having an initial or remaining term of more than
one year were:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER ALL NON-CANCELABLE OPERATING LEASES
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
2020
|
|
$
|
1,008,227
|
|
|
$
|
38,412
|
|
2021
|
|
|
949,535
|
|
|
|
27,123
|
|
2022
|
|
|
910,166
|
|
|
|
23,201
|
|
2023
|
|
|
835,411
|
|
|
|
3,229
|
|
2024
|
|
|
805,329
|
|
|
|
-
|
|
Thereafter
|
|
|
3,457,048
|
|
|
|
-
|
|
Total lease payments
|
|
|
7,965,716
|
|
|
$
|
91,965
|
|
Less: imputed interest
|
|
|
(2,135,425
|
)
|
|
|
(9,063
|
)
|
|
|
$
|
5,830,291
|
|
|
$
|
82,902
|
|
Terminated
Employment Agreement
An
employment agreement which commenced in 2012 with Thomas Kidrin, the former CEO of the Company, which provided Mr. Kidrin
with salary, car allowances, stock options, life insurance, and other employee benefits, was terminated by the Company in 2017.
At December 31, 2019 and 2018, the Company maintained
an accrual of approximately $1,043,000
for any amounts that may be owed under
this agreement, although the Company contends that such agreement is not valid and no amount is due.
In
July 2019, Mr. Kidrin, also a former director of the Company, filed a complaint in the Massachusetts Superior Court, which
alleges the Company failed to pay all wages owed to him and breached the employment agreement, and requests multiple damages,
attorney fees, costs, and interest. The Company has moved to dismiss certain counts of the complaint and has asserted counterclaims
against Mr. Kidrin alleging breach of contract, breach of fiduciary duty, money had and received, and unjust enrichment. The Company
believes that the allegations in the complaint are without merit and intends to vigorously defend this matter and prosecute its
counterclaims.
Maryland
Acquisition
As previously disclosed in Note 3 –
Acquisitions, Kind has sought to renege on the MOU and the parties’ agreement to a partnership/joint venture
made in the fall of 2016. The Company engaged with the members of Kind in good faith in an attempt to reach updated terms
acceptable to both parties, however the members of Kind failed to reciprocate in good faith, resulting in an impasse.
Incrementally, both parties through counsel further sought to resolve the impasse, however such initiative resulted in both
parties commencing legal proceedings.
In November 2019, Kind commenced an
action in the Circuit Court for Washington County, MD captioned Kind Therapeutics USA, Inc. vs. MariMed, Inc., et al. (Case
No. C-21-CV-19-000670) asserting claims against the Company, including breach of contract, breach of fiduciary duty, unjust
enrichment, and seeking an accounting and declaratory judgment and damages in excess of $75,000.
On November 15, 2019, the Company filed counterclaims against Kind and a third-party complaint against the members of Kind
(Jennifer DiPietro, Susan Zimmerman, and Sophia Leonard-Burns) and William Tham (the “Counterclaims”). The
Counterclaims, as amended, allege breach of contract with respect to each of the partnership/joint venture agreement, the
MOU, the MSA, the Lease, and the Licensing and Manufacturing Agreement (“LMA”), unjust enrichment, promissory
estoppel/detrimental reliance, fraud in the inducement, breach of fiduciary duty, and seeks reformation of the MSA, a
declaratory judgment regarding enforceability of the partnership/joint venture arrangement and/or the MOU, specific
performance of the parties’ various contracts, and the establishment of a constructive trust for the Company’s
benefit. The Counterclaims also seek damages. Both parties, MariMed (including MariMed Holdings MD, LLC and MariMed Advisors
Inc.) and Kind, brought motions for a temporary restraining order and a preliminary injunction. By Opinion and Order entered
on November 21, 2019, the Court denied both parties motions for a temporary restraining order. In its opinion, the Court
specifically noted that, contrary to Kind’s allegations, the MSA and the Lease “appear to be independent, valid
and enforceable contracts.”
A hearing on the parties’ cross-motions
for preliminary injunction was held in September 2020 and November 2020. Also in November 2020, the Court granted the Company’s
motion for summary judgment as to the Lease, determining that the Lease is valid and enforceable. Based on this ruling, the Company
is seeking judgment at trial in the amount of approximately $5.4 million for past due rent and expenses owed by Kind under
the Lease.
In December 2020, the Court entered a Preliminary
Injunction Order, accompanied by a Memorandum Opinion, denying Kind’s motion for a preliminary injunction (which Kind had
withdrawn at the conclusion of the hearing) and granting the Company’s request for preliminary injunction. The Court determined
that the Company is likely to succeed with respect to the validity and enforceability of the MSA and the LMA, that the Company
would suffer substantial and irreparable harm without the preliminary injunction, and that the balance of convenience and public
interest both warranted the issuance of a preliminary injunction in the Company’s favor. The Court ordered, inter alia,
that the MSA and LMA are in effect pending judgment after trial on the merits, and that Kind and its members, and their attorneys,
agents, employees, and representatives, are prohibited from (a) interfering with the Company’s duties and responsibilities
under the MSA and (b) withdrawing funds, making any distribution, paying any loans, returning any capital, or making any payment
towards a debt from any Kind bank or other financial account(s) without written consent of the Company or Order of the Court,
thereby preserving the Company’s control of Kind’s operations and finances at least through the jury trial currently
scheduled to begin on March 28, 2022. Further, the Court ordered Kind to pay management and licensing fees to the Company beginning
January 1, 2021. Kind has noted an appeal of the Order to the Maryland Court of Special Appeals, which is pending; however, the
preliminary injunction order remains in effect.
In addition to the favorable rulings
on the Lease, MSA, and LMA, the Company believes that its claims for declaratory relief, specific performance, and/or breach
of contract with respect to the 70%/30% partnership/joint venture agreement claims are meritorious. Further, the Company
believes that Kind’s claims against the Company are without merit. On March 18, 2021, the Court issued an opinion and
order on Kind’s motion for summary judgment finding that the MOU was not enforceable by the Company against Kind as a
final binding agreement. The Company is evaluating an appeal of this ruling which under Maryland rules can only be pursued
upon final judgment. The Company intends to aggressively prosecute and defend the action. Trial has been scheduled from March
28, 2022 to April 11, 2022.
Lawsuit
In August 2020, Jennifer DiPietro, directly
and derivatively on behalf of Mari Holdings MD LLC (“Mari-MD”) and Mia Development LLC (“Mia”), commenced
a suit against the Company’s CEO, CFO, and wholly-owned subsidiary MariMed Advisors Inc. (“MMA”), in Suffolk
Superior Court, Massachusetts.
In this action, DiPietro, a party to
prior ongoing litigation in Maryland involving the Company and Kind as discussed above, brings claims for breach of fiduciary
duty, breach of contract, fraud in the inducement, aiding and abetting the alleged breach of fiduciary duty, seeks access to
books and records, and an accounting related to her investments in Mari-MD and Mia. DiPietro seeks unspecified money
damages and rescission of her interest in Mari-MD, but not of her investment in Mia, which has provided substantial returns
to members.
The Company has answered the complaint
and MMA has moved for leave to file counterclaims against DiPietro on its own behalf and derivatively on behalf of Mari-MD for
breach of her fiduciary duties to each of those entities, for tortious interference with Mari-MD’s lease and MMA’s
management services agreement with Kind, and for breach of Mari-MD’s operating agreement.
The Company believes that the allegations
of the complaint are without merit and intends to defend the case vigorously. The Company’s counterclaim seeks monetary
damages from DiPietro, including the Company’s legal fees in the Kind action.
GenCanna
Bankruptcy
As
discussed in Note 4 – Investments, in February 2020, GenCanna USA, under pressure from certain of its creditors including
MGG, agreed to convert the involuntary bankruptcy proceeding into a voluntary Chapter 11 proceeding. In addition, GenCanna and
GenCanna USA’s subsidiary, Hemp Kentucky LLC (collectively with GenCanna and GenCanna USA, the “GenCanna Debtors”),
filed voluntary petitions under Chapter 11 in the Bankruptcy Court.
In
May 2020, after an abbreviated solicitation/bid/sale process, the Bankruptcy Court, over numerous objections by creditors and
shareholders of the GenCanna Debtors which included the Company, entered an order authorizing the sale of all or substantially
all of the assets of the GenCanna Debtors to MGG. After the consummation of the sale of all or substantially all of their assets
and business, the GenCanna Debtors n/k/a OGGUSA, Inc. and OGG, Inc. (the “OGGUSA Debtors”) filed their liquidating
plan of reorganization (the “Liquidating Plan”) to collect various prepetition payments and commercial claims against
third parties, liquidate the remaining assets of the ODDUSA Debtors, and make payments to creditors. The Company and the unsecured
creditors committee filed objections to such Liquidating Plan, including opposition to the release of litigation against the OGGUSA
Debtors’ senior lender, MGG, for lender liability, equitable subordination, and return of preference. As a part of such
plan confirmation process, the OGGUSA Debtors filed various objections to proofs of claims filed by various creditors, including
the proof of claim in the amount of approximately $33.6 million filed by the Company. Through intense and lengthy negotiations
with the OGGUSA Debtors and the unsecured creditors committee regarding the objections to the Liquidating Plan, the Company reached
an agreement with the OGGUSA Debtors to withdraw the objections to the Company’s claim and to have it approved by the Bankruptcy
Court as a general unsecured claim in the amount of $31.0 million.
Since
the approval of the Liquidating Plan, the OGGUSA Debtors have been in the process of liquidating the remaining assets, negotiating
and prosecuting objections to other creditors’ claims, and pursuing the collection of accounts receivable and Chapter 5
bankruptcy avoidance claims. As of the date of this filing, there is insufficient information as to how much of the Company’s
allowed claim will be paid upon the completion of the liquidation of the remaining assets of the OGGUSA Debtors.
NOTE
22 – SUBSEQUENT EVENTS
Financing
Transaction
In
March 2021, the Company entered into a securities purchase agreement with Hadron Healthcare Master Fund (“Hadron”)
with respect to a financing facility of up to $46.0 million in exchange for newly-designated Series C convertible preferred stock
of the Company and warrants to purchase the Company’s common stock.
At
the closing of the transaction in March 2021, Hadron purchased $23.0 million of Units at a price of $3.70 per Unit. Each Unit
is comprised of one share of Series C preferred stock and a four-year warrant to purchase two and one-half shares of common stock.
Accordingly, the Company issued to Hadron 6,216,216 shares of Series C preferred stock and warrants to purchase up to an aggregate
of 15,540,540 shares of common stock. Each share of Series C preferred stock is convertible, at Hadron’s option, into five
shares of common stock, and each warrant is exercisable at an exercise price of $1.087 per share. The warrants shall be subject
to early termination if certain milestones are attained and the market value of the Company’s common stock reaches certain
predetermined levels.
In
connection with the closing of the transaction, the Company filed a certificate of designation with respect to the rights and
preferences of the Series C convertible preferred stock. Such stock is zero coupon, non-voting. and has a liquidation preference
equal to its investment amount plus declared but unpaid dividends. Holders of Series C convertible preferred stock are entitled
to receive dividends on an as-converted basis.
Of
the $23.0 million of proceeds received by the Company in March 2021, approximately (i) $7.8 will fund construction and upgrades
of certain of the Company’s owned and managed facilities, and (ii) $15.2 million was used to pay down debt and obligations,
comprised of the $4.4M Notes, the $1M Note, the New $3M Note, the $5.8M Note, the Existing Notes, a portion of the Third Party
Notes (all referred to in Note 11 – Debt), and a portion of the Due To Related Parties balance discussed in
Note 20 – Related Party Transactions.
The
balance of the committed facility of up to an additional $23.0 million is intended to fund the Company’s specific targeted
acquisitions provided such acquisitions are contracted in 2021 and consummated, including obtaining the necessary regulatory approvals,
no later than the end of 2022. Such funds shall be provided by Hadron on the same aforementioned terms as the initial proceeds.
Provided
that as at least 50% of the shares of Series C convertible preferred stock remain outstanding, the holders shall have the right
to appoint one observer to the Company’s board and to each of its board committees, and appoint a member to the Company’s
board if and when a seat becomes available, at which time the observer roles shall terminate.
The
transaction imposes certain covenants on the Company with respect to the incurrence of new indebtedness, the issuance of additional
shares of any designation of preferred stock, and the payment of distributions.
Lease
Agreement
In
February 2021, the Company entered into a five-year
lease agreement for a 12,000
square foot premises located in Wilmington,
DE which the Company intends to develop into a cannabis production facility with offices, and sublease to its cannabis-licensed
client in this state. The lease contains an option to negotiate an extension at the end of the lease term.
Investment
Agreement
In
January 2021, the Company and MRSVP entered into an agreement whereby the Company assigned and transferred membership interests
comprising an 11% ownership in MRSVP in exchange for a release from all further obligation by the Company to make future investments
or payments and certain other non-monetary consideration. Following the interest transfer, the Company’s ownership interest
in MRSVP was reduced to 12% on a fully diluted basis.
Conversion
of Debentures Payable
In
January 2021, the holder of the $21M Debentures converted $1,300,000 of principal and approximately $56,000 of accrued interest
into 4,610,645 shares of the Company’s common stock at a conversion price of $0.29 per share. After this conversion, the
entire $21M Debentures were retired and no amounts remain outstanding.
Equity
Transactions
In
the first quarter of 2021, the Company granted five-year
options to purchase up to 975,000
shares
of common stock at exercise prices ranging from $0.51
to $0.90
per share. The aggregate fair value of
these options of approximately $372,000
will be amortized to compensation expense
over the respective vesting periods. Also during this period, (i) a warrant to purchase 50,000
shares
of common stock at $0.15
per share was exercised, (ii) a warrant
to purchase up to 200,000
shares of common stock at $1.75
per share was forfeited, (iii) a three-year
warrant to purchase up to 100,000
shares of common stock at $0.82
was issued, and (iv) 42,857
shares of common stock were issued to
settle an outstanding obligation.
Revised Note Receivable
In March 2021, the Company was issued a
revised promissory note from Healer in the principal amount of approximately $894,000 representing the previous loans of $800,000
extended to Healer by the Company plus accrued interest through the revised promissory note issuance date. The revised promissory
note bears interest at a rate of 6% per annum and requires quarterly payments of interest from April 2021 through the maturity
date in April 2016. Additionally, the Company has the right to offset any licensing fees owed to Healer by the Company
in the event Healer fails to make any timely payment. In March 2021, the Company offset approximately $28,000 of licensing fees
payable to Healer against the principal balance of the revised promissory note, reducing the principal amount to approximately
$866,000.
Common
Stock Issuance Obligations
In
February 2021, the Company issued 11,413 shares of common stock in connection with the stock grant to a current employee previously
disclosed in Note 14 – Stockholders’ Equity.